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INDIA'S BALANCE OF 
INDEBTEDNESS 

1898-1913 



INDIA'S BALANCE OF 
INDEBTEDNESS 

1898-1913 

by 
Y. S. PANDIT, M.A. 



With a Foreword by 

SIR JEHANGIR COYAJEE 



LONDON 

GEORGE ALLEN $_ UNWIN LTD 
MUSEUM STREET 



FIRST PUBLISHED IN IQ37 



All rights reserved 



PRINTED IN GREAT BRITAIN BY 
UNWIN BROTHERS LTD., WOKING 



TO 

MY MOTHER 



PREFACE 

THIS inductive study of India's balance of indebtedness during 
1898 to 1913 was undertaken at the suggestion of Professor 
D. Ghosh Qf the University School of Economics and Sociology, 
Bombay. The work has been carried out entirely on the lines 
of Professor Jacob Viner's study of Canada. There were a 
great many difficulties in applying Viner's methods to Indian 
conditions, but I faced them with confidence with the help 
of Professor Ghosh, to whom I am greatly indebted for 
constant advice and criticism in completing this study. 

My debt to Professor Jacob Viner, though indirect, is also 
equally great. The influence of his monumental work can be 
seen throughout the present study. 

I am specially indebted to Sir Jehangir C. Coyajee who, 
in spite of his preoccupations, kindly consented to write a 
Foreword to this book. 

I also acknowledge my indebtedness to the University of 
Bombay for the substantial financial help it has granted 
towards the cost of the publication of this book. 



Y. S. PANDIT 



BOMBAY 

October 1936 



FOREWORD 

IN 1924 Jacob Viner an eminent American Professor 
published his famous and epoch-making study of Canada!* 
Balance of Indebtedness. His lead has been taken up by quite 
a number of economists who have tested the validity of the 
economic theory of international adjustment from the ex- 
perience of their several countries. Mr. Pandit's work forms 
an important addition to the growing literature on this branch 
of applied Economics. Our author has selected India's ex- 
perience during the period 1898-1913 as the subject of his 
study. This was a period of increased foreign borrowings by 
India and of expanding foreign demand for her products. It 
was also the period during which the Gold Exchange Standard 
was being gradually introduced into the country. The author 
had thus the opportunity of finding out not only whether the 
theory of international adjustment is borne out by India's 
experience but also of showing to what extent, if any, the 
process of adjustment was affected by her peculiar currency 
organization. An opportunity was afforded to him of studying 
the history of Indian currency from a new point of view. 

Such a study as that carried out by Mr. Pandit regarding 
the interrelations of the foreign borrowings, the barter terms 
of trade, and the price-level of India throws important light 
upon the currency controversies of our country alike new and 
old. Thus in their study of the great rise of prices in India 
during the first decade of this century, critics like the late 
Professor Nicholson and his followers were so obsessed with 
the supposed imperfections of the Gold Exchange Standard as 
a monetary system that they attributed the rise of prices 
entirely to these imperfections and drawbacks and lost sight 
of the great importance of the changes in the volume of our 
foreign trade, especially of the increased volume of our exports. 
The errors of these critics might, however, be condoned to a 



12 India's Balance of Indebtedness 

considerable extent, since they were writing before the labours 
of Professors Taussig and Viner as well as of others showed the 
true relations between the position of a country in inter- 
national trade and capital market and the price-level pre- 
vailing in it. Basing myself on the results and theories of these 
eminent writers I showed in my Indian Currency System that 
it was the increasing demand for Indian exports and the 
improved position of India in international trade which were 
in the main the ultimate causes of the rising prices of India. 
Mr. Pandit has worked out the topic at even greater length 
and with a wealth of statistical material; and he has demon- 
strated the bearings of the increased demand for India's 
exports and of her borrowings on the country's price-level 
at the time. 

A study of Mr. Pandit's book will benefit alike the student 
of economic theory and one who is interested in the monetary 
and financial history of our country. There are notable studies 
in the work of India's commodity balance of trade, its balance 
of service transactions, and its balance of non-commercial 
transactions. There is a good deal that is original in these 
chapters as also in the examination of the amount of foreign 
capital invested in India. Then follows a comprehensive and 
careful study of the mechanism of adjustment, of the adjust- 
ment of the balance payment and changes in relative price- 
levels. 

I can best conclude these few introductory remarks by 
expressing a hope that Mr. Pandit's book will secure that 
attention from our publicists and students of Economics 
which it well deserves; and that it will contribute to the 
clarification of ideas on important aspects of problems relating 
to our foreign trade and currency. 

J. C. COYAJEE 

BOMBAY 

November J, 1936 



CONTENTS 

PAGE 

PREFACE 9 

FOREWORD n 

INTRODUCTION 17 

PART I 

STATISTICAL ANALYSIS 
INTRODUCTORY 23 

CHAPTER I 

INDIA'S COMMODITY BALANCE OF TRADE 25 

The Indian Commerce Statistics, 26; Method of compila- 
tion, 26; Methods of computing values, 28; Omissions and 
inclusions, 29; Selection of the year, 30; Accuracy of Indian 
Commerce Statistics, 30; Methods of ascertaining freight 
charges, 35; Professor Viner's method, 38; Method of ascer- 
taining insurance charges, etc., 45. 

CHAPTER II 

BALANCE OF SERVICE TRANSACTIONS 49 

Freight payments, 49; Freight payments on foreign trade, 50; 
Freight payments on coastal trade, 5 1 ; Insurance and banking 
payments, etc., 57; Marine insurance, 57; Profits of the Ex- 
change Banks, 58; "Home charges/' 61 ; India Office expenses 
and the charges for the diplomatic services in Persia and China, 
63 ; Payments in connection with civil departments in India, 63 ; 
Payment for the management of the debt, 64 ; The Army and 
Marine effective charges, 64; Tourists expenditure, etc., 65. 

CHAPTER III 

BALANCE OF NON-COMMERCIAL TRANSACTIONS 67 

Immigrants' capital, 68; Means of remittance from India, 74; 
Foreign money-order transactions, 75; British postal orders, 
77 ; Through foreign money orders, 78 ; Remittances through 
Exchange Banks, 80. 



14 India's Balance of Indebtedness 

PAGE 
CHAPTER IV 

INDIA'S BALANCE OF INDEBTEDNESS 84 

Councils and Reverse Councils, 84; Cash balances and 
reserves of the Secretary of State, 87 ; Railway annuities and 
sinking fund, 91 ; India Bills, 91 ; Movement of securities, 
92 ; Miscellaneous deposits and remittances, 93 ; Preliminary 
balance of international indebtedness, 95 ; Interest payments 
by India, 95. 

CHAPTER V 

CAPITAL INVESTMENTS IN INDIA A VERIFI- 
CATION 104 

Statistics of international investments, 104; Great Britain's 
public investments in India, 106; Edgar Crammond's esti- 
mate, 1 08; Sir George Paish's estimate of British investments 
in India, no; The extent of British capital in India: H. F. 
Howard, 113; Limitations of the preceding estimates, 117; 
Verification of Table XXII, 120 ; British private investments in 
India, 122. 



PART II 

MECHANISM OF ADJUSTMENT 

INTRODUCTORY 135 

The gold-exchange standard, 138. 

CHAPTER VI 

FOREIGN EXCHANGE AND GOLD MOVEMENTS 140 

Foreign exchange, 140; Rupee- Sterling exchange and the 
gold-points, 144; Gold movements, 150; Summary, 155. 

CHAPTER VII 

CHANGES IN RELATIVE PRICE-LEVELS AND THE 

ADJUSTMENT OF THE BALANCE OF PAYMENT 157 

Index numbers of Indian prices, 159 ; Index numbers of whole- 
sale prices in the United Kingdom, 161 ; Sectional price- 
levels, 165 ; Domestic, import, and export prices in India, 167; 
The generally prevailing explanation of the rise of prices in 
India, 171; Summary, 176. 



Contents 15 

PAGE 
CHAPTER VIII 

ADJUSTMENT OF THE BALANCE OF PAYMENT 

AND THE BARTER TERMS OF TRADE 177 

Commodity balance of trade, 177; Foreign borrowings and 
the terms of international exchange, 1 82 ; The barter terms 
of trade, 1 83 ; The measurement of the barter terms of trade, 
184; Indians net barter terms of trade, 185; India's gross 
barter terms of trade, 186; Money wages and the barter 
terms of trade, 1 89. 

CONCLUSION 192 

APPENDIX I 195 

APPENDIX II 199 

APPENDIX III 200 

BIBLIOGRAPHY 201 

INDEX 209 



INTRODUCTION 

THE possibility of applying inductive methods in co-operation 
with deduction to describe and explain the changes in the 
volume and character of international trade, the movements 
of price-levels, the part played by exchange rates and gold 
movements in the adjustment of trade balances and the reaction 
upon internal economic conditions of changes in international 
trade, has been proved by the researches in that field made 
by the students of Professor Taussig. The quantitative deter- 
mination of the division of gains from international trade is 
beyond solution by either method, but here also measurement 
of relative changes is quite possible. For that, inductive method 
can be used both to test the expectations of deductive theory 
as to the direction of the change in the division of the gains, 
following upon a major disturbance in the conditions governing 
international trade, and given the direction of this change to 
measure the degree of change in the ratio in which the gains 
are divided. 

The present study is an attempt at inductive analysis of 
the mechanism of adjustment of trade balances, with special 
reference to Indian conditions during 1898 to 1913. There 
are a good many reasons pointing to Indian trade history 
during this period as a particularly fruitful field for research. 
To begin with, an inductive investigation of social phenomena, 
in order that it may bring results of any definiteness and relia- 
bility, must confine itself to factors which in the situation 
studied are of sufficient importance to influence appreciably 
the phenomena causally related to it. If minor factors in a 
complex situation are investigated with the intention of 
|neasuring their effects, it is often found that their effects are 
So mixed up with the effects of other factors as to be com- 
jpletely lost in the complexity of the situation. If, therefore, we 
faant to attempt an inductive analysis of the mechanism of 

B 



1 8 India's Balance of Indebtedness 

adjustment of trade balances, the factors creating the trade 
balances must be sufficiently powerful to dominate the whole 
situation and there must not be any other factor besides 
them disturbing the process of adjustment. The period 1898 
to 1913 is a period in Indian economic history conforming to 
these conditions : 

Firstly, this period was marked by a general business prosperity 
all over the world punctuated by the crisis of 1907. 

Secondly, the even balance between India's credit and debit 
international obligations which existed before 1898 was disturbed 
during the period by two important factors connected with the 
balance of payments, viz. the foreign borrowings and the increased 
foreign demand for India's export commodities. 

Thirdly, the fluctuations in the rupee-sterling ratio which were 
a great disturbing factor to India's foreign trade during the eighties 
of the nineteenth century was absent during this period because 
of the introduction of the gold-exchange standard. 

Out of the two factors disturbing the even balance of pay- 
ment we have devoted our attention mainly to the adjustment 
of India's balance of indebtedness to foreign borrowings and 
only incidentally to the adjustment of trade balances caused 
by the increased foreign demand for India's export com.- 
modities. The purpose of restricting our attention mainly 
to the adjustment of foreign borrowings is to find out whether 
the mechanism of adjustment of balance of indebtedness is 
the same under a gold-exchange standard as under a gold 
standard, and, if different, how far it is different. 

The study is divided into two parts. In the first part, which 
deals with a statistical analysis of India's annual balance of 
payment every year during 1898 to 1913, an attempt has been 
made to evaluate all the important items of payment, visible 
as well as invisible. The balance of payment itself has been 
split up into four parts, viz.: Balance of Commodity Trans- 
actions, Balance of Service Transactions, Balance of Non- 
commercial Transactions, and the Balance of Indebtedness, 



Introduction 19 

and each part has been separately treated in detail. Finally, 
we have tried to verify the indirect estimate of India's balance 
of indebtedness with the help of all the available data bearing 
directly on India's foreign borrowings. For the purpose of 
this statistical analysis we have considered only the sea-borne 
foreign trade of India and ignored the transfrontier trade, 
which hardly comes up to 5 per cent of the former. It is 
necessary to state here that the estimates of different items 
in India's balance of payment made in this part are approxi- 
mate at the most. 

In the second part we have tried to find out how far the 
classical theory of the mechanism of adjustment of inter- 
national indebtedness is borne out by Indian conditions 
during the period of our study. In this connection we have 
examined the course of India's foreign exchanges, gold move- 
ments Council Bills price-levels, commodity imports and 
exports, and barter terms of trade. However, as the behaviour 
of these factors during 1898 to 1913 was influenced jointly 
by the foreign borrowings of India and the increasing demand 
for her exports, it has not been possible to establish a causal 
relation between the behaviour of these factors and the foreign 
borrowings alone. Still, a partial corroboration of the classical 
theory of the mechanism of adjustment has been obtained. 



PART I 
STATISTICAL ANALYSIS 



INTRODUCTORY 

IN order to avoid any misunderstanding we give here a brief 
explanation of some of the important terms used in the 
following p^ges. 

A transaction which creates a pecuniary obligation on the 
part of a person in India towards someone outside India is 
called a debit transaction, and one which creates an obligation 
towards an Indian by a person outside India is called a credit 
transaction. The difference between the total of Indian credit 
and debit international transactions constitutes India's balance 
of indebtedness. If the credits exceed the debits there is a 
credit balance of indebtedness, and if the debits exceed the 
credits there is a debit balance of indebtedness. The balance 
of payments (assuming that all immediate obligations are 
immediately liquidated) represents the difference only between 
immediate credit and debit obligations and not the difference 
between all the credit and debit obligations immediate as 
well as deferred which we designate as the balance of indebted- 
ness. If some of the transactions are on a deferred payment 
basis, as is generally the case, there may be a debit balance of 
indebtedness at the same time that there is a credit balance of 
payments and vice versa. The commodity balance of trade, 
the balance of service transactions, and the balance of non- 
commercial transactions represent, respectively, the differences 
between the imports and exports of commodities, the imports 
and exports of services, and the inward and outward remittances 
on non-commercial account, irrespective in each case whether 
or not the obligations created thereby are immediate or deferred. 
The total of these three balances equals the balance of inter- 
national indebtedness, which for any period is equivalent to 
the difference between the total foreign loans and the total 
foreign borrowings of a country during that period. 

In this part of the study, the commodity balance of trade, 



24 India's Balance of Indebtedness 

the balance of service transactions, and the balance of non- 
commercial transactions for India are first estimated for each 
year during the period 1898 to 1913 and the balance of India's 
international indebtedness is then compiled from these partial 
balances. This balance of indebtedness gives an indirect 
estimate of the total amount of foreign capital r invested in 
India during the period. The correctness of this indirect 
estimate of foreign investments in India and indirectly of the 
various estimates involved in calculating the partial balances 
is then tested by a direct estimate of the amount of foreign 
capital invested in India based upon the available information 
bearing on such investments. 



CHAPTER I 

INDIA'S COMMODITY BALANCE OF TRADE 

THE term "Commodity Balance" means the balance or the 
difference between the values of import and export of goods. 
In ascertaining the commodity balance of a country, trade in 
precious metals is sometimes included in and sometimes 
excluded from the balance sheet, according to the purpose in 
view. If the balance is to be struck simply to realize the extent 
of immediate obligations during a particular year, which is 
not liquidated by any shipment of goods or services, the 
transactions in precious metals are excluded. Their main 
function in that case is to settle the balance of immediate 
obligations in respect of commodities and services which is 
to be ascertained. When, however, the purpose is to find out 
the balance of all the obligations, immediate as well as deferred, 
which is not liquidated even by means of gold and silver, the 
trade in precious metals is invariably included in the balance 
sheet of commodity transactions. 

This part of our study is entirely concerned with a detailed 
analysis of our balance sheet and the evaluation of various 
items entering the account of our international credits and 
debits. To us, therefore, it does not matterwhether in the com- 
modity balance of trade we include transactions in precious 
metals or not. However, there is a reason which suggests their 
inclusion. Since the closure of Indian mints to the free coinage 
of silver in 1893, imports and exports of precious metals 
(barring the coins, which form a very small proportion of the 
total transactions) have been pure commodity transactions, 
having no direct relation to the currency circulation in the 
country. 

Information about the annual foreign trade of India in 
goods and treasure is available in the statistical publications 



26 India's Balance of Indebtedness 

of the Government of India relating to the trade of British 
India. These exclude from their purview the trade of French 
and Portuguese India, the ports of the Indian Native States, 
and the small Indian Dependencies. 1 But the foreign sea- 
borne trade of British Indian ports represents "not merely 
the trade of the territory directly under British administration, 
but rather the trade of the whole of India and Burma, including 
the Indian States." 

In order to be able to understand and interpret the figures 
relating to our sea-borne trade which are given in the various 
statistical publications of the Government, it is essential to 
know the method of their compilation, the system of com- 
puting their values, the items they include and exclude, and 
the unit of period for which they are made up. 

THE INDIAN COMMERCE STATISTICS 

(i) Method of Compilation 

The statistical data for the foreign trade of British India are 
first collected by the Customs Department and are based upon 
values declared by importers and exporters. The declarations 
in the "Bills of Entry" and "Shipping Bills" are, however, 
checked by Customs officials before they are recorded for 
statistical purposes. The figures thus collected are reworked 
by the Commercial Intelligence Department into other forms 
and are published with elaborate classification in the Annual 
Statement of the Sea-borne Trade and Navigation of British 
India for fiscal years ending March 3ist, and with less detail 
in the ^counts relating to the Sea-borne Trade and Navigation 
of British India for the calendar year. Since April i, 1911, 
statistics of imports have included all goods landed on Indian 
shores, even though some of them might be imported for 
re-export; the imports are credited to the country which 

1 League of Nations' Memorandum on Balance of Payments and 
Foreign Trade Balances, 1910-23, vol. ii, p. 317. 



India's Commodity Balance of Trade 27 

sends them directly to India without any break of journey, 
except for change of conveyance or route. The country con- 
cerned may not necessarily be the producer of the goods; it 
is sufficient if it owns them at the time they are exported. 1 In 
the case of exports a distinction is made between exports of 
Indian merchandise goods produced or manufactured in 
India and exports of foreign merchandise, i.e. goods im- 
ported from foreign countries for re-export. 2 The exports and 
re-exports are both credited to India and debited against the 
countries of final destination irrespective of their possessing a 
sea-borne trade or not. The double entry of re-exported goods, 
first in the statement of imports and then in the statement of 
exports, prevents them from having any serious effect on 
India's commodity balance of trade, the accretion or decretion 
of values of the re-exported goods due to a change in their 
prices in the interval between their import into India and 
their re-export from it and also due to the addition of ware- 
housing charges being very small. In addition to the figures 
thus collected from the declarations of importers and ex- 
porters, articles imported and despatched by parcel post 
and registered letter post are also adequately recorded 
though they are not classified according to the nature of their 
contents; they appear under the general heading of Postal 
Articles. 

Prior to April i, 1911, imports and exports were credited 
to the countries in which the port of shipment for imports 
and the port of discharge for exports were situated. It was 

1 "The country of consignment is defined as 'that from which the 
goods have come whether by land and sea or by sea only, without 
interruption of transit save in the course of transhipment or transfer 
from one means of conveyance to another/ " Accounts relating to the 
Sea-borne Trade of India. Introductory Notes. 

a "Tne country of final destination is defined as 'that to which 
goods exported from India are intended to pass whether by sea and 
land or by sea only, without interruption of transit save in the course 
of transhipment or transfer from one means of conveyance to 
another.' " Ibid. 



28 India's Balance of Indebtedness 

natural, therefore, that countries like Switzerland, which had 
no sea-borne trade whatsoever, never made their appearance in 
the Indian statistical tables. "Moreover, although the port of 
discharge for exports was taken to mean the final port in cases 
of transhipment, the port of shipment for imports was in 
cases of transhipment taken to be the port of transhipment 
and not the original port of shipment except in those cases, by 
no means general, where a through bill of lading had been 
granted." 1 

(2) Methods of Computing Values 

In computing the values of Indian imports and exports the 
methods used are those which are common to the majority of 
commercial countries in the world. Imports are valued on 
their arrival at the port of entry, freight, insurance, and trans- 
port charges being included, i.e. on what is technically known 
as the c.i.f. basis (c.i.f. = cost, insurance, and freight). On 
the other hand, these charges are excluded in computing 
the values of our exports, which are therefore said to repre- 
sent f.o.b. values f.o.b. meaning free on board ship. The 
values recorded by the Customs Department in India for 
statistical purposes are the actual market values which are 
arrived at by deducting from the wholesale cash price of the 
goods concerned the genuine trade discount which the goods 
of the like kind are likely to command, when sold at the time 
and place of importation or exportation as the case may be. 
No other abatement or deduction in their values is effected 
unless it be the amount of duties payable in the case of imports. 
When, however, the wholesale cash price of a particular com- 
modity, imported or exported, is not ascertainable, the com- 
modity being altogether new to the market, the recorded value 
represents the cost at which goods of the like kind and quality 
could be delivered at such place with the necessary modifica- 

1 Accounts relating to the Sea-borne Trade of India. Introductory 
Notes. 



Indicts Commodity Balance of Trade 29 

tions in respect of duties and trade discounts. These recorded 
values do not necessarily represent the actual cash prices 
receivable or payable by India on her exports or imports. 

The existence of a higher level of import duties induces the 
importer to understate the value of his goods. (The higher the 
level of import tariff the larger the percentage of under- 
valuation which is likely.) The League of Nations in cal- 
culating the balance of payments of different countries allows 
an extra 5 per cent for the possible undervaluation of imports 
in this manner. But we must remember that the League's 
calculations refer to post-war years when the general level 
of import duties in the world was fairly high. On the other 
hand, the level of duties in India during the period of our 
study was much lower and hence a much smaller allowance 
should be made for the undervaluation of her imports. We 
have in our study corrected the recorded values of Indian 
imports by making an allowance of i per cent for under- 
valuation. 

(3) Omissions and Inclusions 

In every country the recorded statistics of imports and exports 
take account of certain articles which, according to the strict 
theory of international trade, ought to be totally excluded, 
while others which ought to be included are ignored. This is 
due to the "conditions peculiar to the trade" of different 
countries or the result of some long-standing practice in the 
department responsible for the collection of statistics. We must 
therefore search out the unscientific inclusions and omissions 
of this character in the statistics of commodity imports and 
exports of India and make allowance for them in striking the 
commodity balance. 

One such item is "settlers' effects." The value of all dutiable 
articles found in the luggage of passengers is recorded along 
with the imports of commodities. But these articles move with 
their owners and do not give rise to any international obliga- 



30 India's Balance of Indebtedness 

tions. Again, though the movements of dutiable luggage 
apparently resemble capital movements, they are really quite 
different because they do not necessitate payment of interest 
and repayment of the principal. Hence the value of "settlers* 
effects'* included without justification in the statistics of 
commodity imports must be deducted. On the other hand, the 
"fish caught in extra-territorial waters and landed direct 
from the fishing-grounds," imports of ships except those for 
inland or harbour navigation and the imports of diamonds 
and other precious stones, 1 which are not reckoned in our 
trade statistics, must receive due consideration in India's 
commodity balance of trade. However, as neither of the items 
enumerated above can be evaluated even approximately and 
as they are comparatively insignificant in value, we shall ignore 
them. 

(4) Selection of the Year 

For the sake of this study, which comprises the pre-war period 
of the Gold-Exchange Standard, we have selected the Indian 
fiscal year as our basis. This is mainly because the major 
portion of Indian statistics is published for the fiscal year 
only, and as we may have to correlate our trade figures with 
other economic data, which are also published for the fiscal 
year, it will save us a good deal of trouble if we choose the 
fiscal year rather than the calendar year. 2 

(5) Accuracy of Indian Commerce Statistics 

We have now examined the basis of our commercial statistics 
and the system of their collection and tabulation. We shall 

1 G. Findlay Shirras, "India's Real Balance of Trade." A paper 
read before the Seventh Indian Economic Conference. Proceedings, 
p. 72. 

* Wherever it will be necessary to adjust calendar year figures to 
the fiscal year basis the adjustment will be brought about on the 
assumption of equal monthly distribution of the data for the whole 
of the calendar year. 



India's Commodity Balance of Trade 31 

next see how far they are accurate and what are their draw- 
backs. In the first place, our statistical records are often faulty. 
In many cases the figures for a particular item do not agree 
with the figures for the same item presented in a later issue 
of the same publication. The discrepancies, though not big 
enough to upset rough calculations, are sufficiently embar- 
rassing to an honest researcher. In a situation like this we 
have to rely on our discretion for the selection of proper 
figures, which leaves a margin, however small, for error. The 
second and the greatest defect of our commercial statistics is 
their lack of uniformity. Even if the frequent changes in the 
system of classifying the traded goods with which we are not 
immediately concerned be ignored, the changing monetary 
unit in which values are expressed is extremely embarrassing. 
Till 1873-74 th e values of imports and exports were expressed 
in pounds. From 1873-74 to 1898-99 they were recorded in 
rupees. There was a reversion to the sterling basis in the 
latter year when again the pound was selected as the unit of 
recorded values and remained as such till the year 1913-14. 
Since that year the rupee has been used as the unit of value. 
Fortunately, however, these changes do not affect the period 
of our study 1898-1913. During these years all foreign trade 
values were, as we have noted, recorded in pounds and we 
have only to convert them into rupees to make them directly 
comparable with other figures. Thirdly, sometimes even the 
columns of the statistical tables are not properly captioned 
and footnotes are not given where they are absolutely necessary 
to avoid misunderstanding and wrong interpretation. In spite 
of these defects, however, we have to rely on official statistics 
as the only source of our information, allowing for their in- 
accuracies and inconsistencies before we draw important 
conclusions. 

Table I represents the balance of transactions in mer- 
chandise, including Government stores. 

Statistics regarding the imports and exports of treasure 



34 



Indicts Balance of Indebtedness 



India do not show a proportionate increase with the total net 
imports of precious metals. 

Table II shows India's balance of transactions in precious 
metals. 

Now, it might appear at first sight that given the balances 
of transactions in merchandise and treasure, calculation of 

TABLE II 
BALANCE OF TRANSACTIONS IN TREASURE 



(In lakhs of Rupees) 

Imports* 



Exports 





Government 


Private 




Government 


Private 


1 


Year 


Account 


A ccount 


Total 


Account 


A ccount 


Total 


1898-99 


I 


1,789 


1,790 




741 


741 


1899-00 


I 


2,096 


2,097 




795 


795 


1900-01 


812 


1,646 


2,458 


675 


748 


1,423 


1901-02 


94 


1,965 


2,059 


300 


847 




1902-03 


13 


2,525 


2,538 


85 


869 


*954 


1903-04 


658 


3,194 


3,852 


689 


804 


1,493 


1904-05 


648 


3,302 


3,950 


844 


809 


1,653 


1905-06 


1,072 


2,092 


3,164 


I O2 


1,444 


1,546 


1906-07 


1,737 


2,720 


4,457 






57i 


1907-08 


946 


3,282 


4,228 




545 


545 


1908-09 


ii 


2,262 


2,273 


36 


595 


' 631 


1909-10 


9 


3,742 


3,751 




638 


638 


I9IO-II 


7 


3,966 


3,973 




712 


712 


I9II-I2 


5 


5,341 


5,346 




1,037 


1,037 


1912-13 


1,063 


5,120 


6,183 


358 


705 


1,063 


1913-14 


682 


3,662 


4,344 


3 


705 


708 


* Import values presented in these columns include 


freight and 


insurance 


charges. 















the commodity balance of trade is only a step further. But 
this is not so. As we have already seen, the recorded values of 
our imports include freight and insurance charges in addition 
to their cost prices. In a purely commodity balance of trade, 
however, payments for invisible items like freight and insurance, 
which are in the nature of services, ought not to figure. The 
values of these items, therefore, will have to be deducted from 
the recorded values of our imports before we can strike a 
pure commodity balance. 
Here we come face to face with a great difficulty. No separate 



India's Commodity Balance of Trade 35 

statistics of freight and insurance charges payable by India 
are published. In fact, no country in the world publishes 
them. Economists and statisticians, 1 however, have evolved 
a few indirect methods of ascertaining the freight charges 
earned or the freight bill paid by a country. We shall 
examine thesp methods and see hgw far they are available 
for ascertaining freight charges paid on Indian imports 
during 1898-1913. 

METHODS OF ASCERTAINING FREIGHT CHARGES 

The first method is based on the reasoning that "since the 
imports and exports of the whole world are, for the most part, 
the same goods valued at the point of arrival and departure 
respectively, the excess of value of imports should give a rough 
measure of the difference of valuation due to the cost of ocean 
carriage, including freight, insurance, and other charges. "* 
Sir Robert Giffen makes use of this method in his paper on 
The Use of Import and Export Statistics y read before the Royal 
Statistical Society. Giffen estimates the excess of the value of 
world imports over world exports. This sum is assumed to be 
equal to the freight and insurance charges paid on the world 
trade. Making a further assumption that the freight and in- 
surance charges on a country's import trade are the same pro- 
portion of the value of its imports as the total of the world's 
freight and insurance charges are to that of total world imports, 
the freight and insurance charges payable by any country 
can be easily ascertained. 
The implicit assumption of this method is that all import. 

1 Sir R. Giffen, "The Use of Import and Export Statistics, "Journal 
of the Royal Statistical Society, June 1882. 

C. K. Hobson, Export of Capital, "Measurement of the Balance 
of Trade," Economica, May 1921. 

J. Viner, Canada's Balance of International Indebtedness, 

G. L. Wood, Borrowing and Business in Australia. 

* Edgar Crammond, The British Shipping Industry, p. 17. Quoted 
by J. Viner, op. cit., p. 65. 



36 India's Balance of Indebtedness 

values are recorded c.i.f. and all export values f.o.b. in 
statistics of world commerce. In the case of many countries, 
however, this is not true. For example, in the United States of 
America, Canada, British South Africa, Cuba, Mexico, and 
Philippines import statistics are based upon f.o.b. values. 
Naturally, the excess of world imports over worjd exports in 
value, will not include the freight and insurance charges on 
the import trade of these countries, which constitutes a con- 
siderable proportion of the world's import trade. Thus the 
accuracy of the primary data used in this method will suffer. 
Secondly, prior to the relevant publications of the League of 
Nations, there was no authoritative compilation of statistics 
relating to the world's import and export trade, which is also a 
great handicap in the use of this method. Thirdly, a great 
many countries compile their trade statistics on the basis of 
official valuations which are arbitrary in character. The amount 
of error that creeps into the primary data from this fact could 
have been largely reduced if the same method of "official 
valuations" was applied to both imports and exports. But 
that is not always the case, e.g. in Greece import figures are 
based on an official valuation made in 1899, while exports are 
valued at current average prices. 1 In addition to these diver- 
gent practices, the adoption of different fiscal years and of 
different definitions of imports and exports by different 
countries for statistical purposes render consolidation of com- 
mercial data for the world as a whole extremely difficult. 
But even if all these drawbacks could be ignored the applica- 
tion of a world percentage of freight and insurance charges to 
individual countries which differ widely from one another in 
the degree to which their trade is bulky or comes from close- 
by regions or is frontier traffic, has no justification whatsoever. 
The second method is to ascertain the receipts per ton of 
shipping for foreign Mercantile Marines, for which official 

1 C. K. Hobson, "Measurement of the Balance of Trade," Eco- 
nomica, June 1921, p. 133. 



India's Commodity Balance of Trade 37 

statistics are published in Sweden and Denmark, or for those 
shipping companies in the country itself which publish similar 
information, and to deduce therefrom the receipts of the 
country's aggregate tonnage engaged in foreign trade. This 
method can be used to calculate the earnings from shipping 
of a country 'which possesses Mercantile Marine. In the case 
of Great Britain it has been successfully used, because she has 
the largest Mercantile Marine in the world. But our objective 
is to estimate the freight and other charges paid on her import 
trade by India, which does not possess any Mercantile Marine. 
We can, however, assume that the earnings of foreign shipping 
engaged in India's international trade are, after certain deduc- 
tions, equal to the freight and insurance charges on that trade. 
But this would not help us very much. In the first place the 
earnings per ton of foreign shipping for which figures are 
available are the averages of earnings made over all sea-routes. 
Secondly, even if we assume that the earnings per ton on 
Indian trade were equal to these averages, we shall get com- 
posite figures for receipts on import and export trade, while 
we really want to have the figures for our import trade only. 

A third method of estimating the freight earnings or pay- 
ments of a country is to consider all the shipping tonnage 
engaged in her foreign trade as time-chartered and add to the 
charter money the charterer's disbursements for bunker coal 
and port dues. The aggregate of these charges would be the 
gross earnings or gross payments of a country on account of 
freight. If the foreign trade is carried in foreign as well as 
national bottoms, adjustments will have to be made according 
to the proportion of foreign and national shipping. The amount 
of charter money can be calculated from the published market 
rates, and expenditure on bunkers can be reckoned on the 
basis of the average consumption of coal per ton of shipping. 
The most serious drawback of this method is that charter 
rates are available only for tramps. Liners which sail at regular 
intervals, which have a faster speed and which carry a con- 



38 India's Balance of Indebtedness 

siderable proportion of freight, naturally earn more. But 
allowance for the superior earnings of the liners cannot be 
made by means of any known method. Another objection to 
this method, which is a corollary to the first, is that "move- 
ments of tramp freights are not a satisfactory index to move- 
ments of other shipping rates/' The earnings of tramp vessels 
are more fluctuating than the earnings of other kinds of vessels. 

For India this method has been used by Mr. S. N. Haji 
(Manager, Scindia Steam Navigation Company, Ltd., Rangoon) 
to estimate freight charges on India's imports and exports in 
the year 1921-22. It is, however, not possible for us to use this 
method for the present study. Charter rates (or the index of 
charter rates) for tramps engaged in India's import trade during 
the period 1898-99 to 1913-14 are not available. Moreover, 
for reasons already stated, the method is theoretically defective. 

There is a fourth method which was invented by the 
British Board of Trade for ascertaining the percentage increase 
in British shipping earnings between 1913 and 1920.* The 
important ocean trade routes of the world were grouped into 
thirteen main routes and the distribution of British shipping 
on these routes was ascertained. Then from the published rates 
of freight for important commodities the approximate receipts 
for each route were calculated. But this method also cannot be 
of any use to us as the distribution of shipping on the Indian 
trade route, which is considered as one of the main routes, 
cannot be ascertained for the individual years covered by the 
period of our study. 

PROFESSOR VINER'S METHOD 

J. Viner in his critical study of Canada s Balance of International 
Indebtedness has used a different method for calculating the 
freight charges payable by Canada. 2 He collects the average 
freight rates per ton, from United Kingdom to Montreal, on 

1 The Board of Trade Journal, February 3, 1921, p. 116. 

a J. Viner, Canada's Balance of International Indebtedness, p. 68. 



India's Commodity Balance of Trade 39 

iron and steel manufactures and cotton textiles for a normal 
year in the period of his study. He assumes these two groups 
of commodities to represent the bulky and light articles 
respectively, comprising Canada's import trade with Great 
Britain, and computes the percentage of freight charges to 
their import* values per ton. Next, the actual proportions of 
bulky and light articles in the imports are obtained and the 
crude percentages are weighted and averaged. This weighted 
percentage is then applied to the total value of Canada's 
imports from Great Britain and the total absolute freight 
charges are obtained. To use this ad valorem percentage for the 
other years making up his period, he makes adjustments for 
changes in freight rates, prices, and the proportion of bulky 
and light commodities from year to year. This method has been 
slightly elaborated and applied to Australian conditions by 
G. L. Wood. The improvement consists in the selection of a 
large number of articles to represent the import trade, instead 
of a group or two as done by Viner. "The device finally selected 
consisted of taking the analysis of imports into classes made by 
the Commonwealth Statistician, and loading for a normal 
year a sample cargo representative of all lines imported in a 
typical ship of 15,000 tons displacement. . . . For a normal 
cargo composed in this way it was calculated that the value at 
prices prevailing in 1908 was approximately 230,000, upon 
which the freight payable at 1908 rates would amount to about 
15,000, i.e. 6 per cent." 1 

This method of ascertaining freight charges is best suited to 
the Indian situation and is likely to give more reliable results 
than any of the other methods discussed before. We have 
already rejected these either on the ground that their bases 
are faulty or that they are inapplicable to Indian conditions. 
So by a process of elimination we come to select the method 
used by J. Viner. But before proceeding to utilize it we shall 
have to make certain assumptions. We assume that the ad 
1 G. L. Wood, Business and Borrowing in Australia, p. 147. 



40 Indicts Balance of Indebtedness 

valorem percentage of freight charges to the value of our import 
trade with Great Britain is applicable to our import trade with 
all countries. This assumption can be justified on the ground 
that India's import trade with Great Britain during the period 
under consideration was more than 60 per cent of her total 
import trade. We assume, further, that the freight rates on 
imports of cotton manufactures, chemicals, and iron and 
steel goods can be made use of to represent the rates on 
imports of important groups of commodities which covered 
the whole or the major portion of India's import trade 
during the period. Cotton manufactures stand for all kinds 
of textile fabrics, which are the most important group of 
our imports. Chemicals fall into a category by themselves 
on which import freights are exceptionally high and the 
manufactures of iron and steel represent the heavy and bulky 
commodities. 

Instead of strictly adhering to Viner's method and ascer- 
taining the ad valorem percentage of freight charges to import 
values for a normal year we shall calculate the average of the 
ad valorem percentage of freight charges to import values for 
the years 1904-5, 1905-6, 1906-7.* This departure from the 
original method has been made to ensure greater accuracy 
in results. The next step is to collect information on the 
following points: 

(i) Average freight rates per ton on the representative 
commodity groups from the United Kingdom to 
Bombay and Calcutta, the chief ports of import 
in India, for the years 1904-5, 1905-6, and 1906-7. 

(ii) Average import values per ton of the commodity groups 
for the three years. 

(iii) Conversion rate from measurement to weight basis 
for cotton manufactures, the import values of which 
are given per yard and freight rates per ton. 

Instead of one normal year we have taken three normal years. 



India's Commodity Balance of Trade 41 

(iv) The respective shares of our import trade represented 
by the three groups of commodities during the three 
years. 

The data for freight charges and import values are available 
in K. L. Dutta's report on Indian prices. 

For computing the conversion rate of cotton goods from 
measurement to weight basis we have to rely on information 
collected from different sources. The Statistical Abstracts for 
the United Kingdom supplies figures for the annual exports of 
cotton piece-goods in yards only. Professor J. W. Daniels and 
J. J. Jewkes, in an article in the Economic Journal \ give the 
average of piece-goods exported by Great Britain during 
1909-10 to 1913-14 in metric tons. 1 Hence by calculating a 
similar average of piece-goods exports in terms of yards we can 
get the rate of conversion for the piece-goods exported by the 
United Kingdom during those years. From this we can deduce 
the conversion rate for India. 2 About 90 per cent of the cotton 
piece-goods imported by India during the period under study 
were of British manufacture. But the goods taken by India, 
as shown by the post-war particulars, must have been sub- 
stantially lighter, somewhat wider on average, and of cheaper 
grade than the mass of other exports.3 Making allowance for 

1 Professor J. W. Daniels and J. J. Jewkes, "The Crisis in the 
Lancashire Cotton Industry," Economic Journal , March 1927. 

* Statistical Abstracts for the United Kingdom. Average exports of 
piece-goods by the United Kingdom during the period 1909-13 = 6,476 
million yards. Economic Journal^ March 1927, p. 39, average exports 
of piece-goods by the United Kingdom during the period 1909-13 
= 526,837 metric tons. 

i metric ton = 12,292 yards, 
i.e. i Ib. = 5 6 yards. 

There are two assumptions made here which might be stated : (a) that 
the average for 1903-13 applies for the earlier years; (b) the average 
for all British exports applies to exports to India. 

3 A. W. Flux, "British Export Trade/' Economic Journal, December 
6, p. 558. 



42 Indicts Balance of Indebtedness 

this factor, the conversion rate for cotton piece-goods imported 
in India is assumed to be i Ib. = 5 -4 yards. 

All the other necessary data for computing the ad valorem 
percentage of freight charges to import values according to 

the method adopted by us are presented in Table III. 



TABLE III 

IMPORT VALUES AND FREIGHT RATES 
(Average of three years 1904-05 to 1906-07) 









Percentage 








Average 


Average 


of Freight 








Import 


Freight 


Charges to 




Final 




Value* 


Rate 


Import 


Average 


Percentage 


Commodity Group 


per Ton 


per Ton^ 


Values 


Weights 


(weighted) 




Rs. 


Rs. 








Cotton manufactures 


1,701 


10-75 


0-6 


31 


18-6 


Chemicals 


182 


27-5 


15-0 


2 


33'0 


Iron and Steel Manu- 












factures! 








6-2 


67 


4i5'4 



467-0 

4 7 per cent. 

* K. L. Dutta: An Enquiry into the Rise of Prices in India, vol. iii, 
p. 486 Values c.i.f. 

f K. L. Dutta: Ibid., vol. iii, p. 484 Values c.i.f. 

t The ad valorem percentage of freight charges to import values 
in the case of iron and steel manufactures relates to galvanized plates, 
sheets and plates, steel bars, and railway plant and rolling stock. 

The average of the weighted ad valorem percentage of 
freight charges to import values for the three years 1904-5, 
1905-6, 1906-7 has now been calculated. To apply this per- 
centage to the other years during the period 1898-99 to 1913-14 
we have to take into account the changes in the relative weights 
of representative commodity groups, freight rates, and prices 
every year. 

The weights of representative commodity groups and the 
corresponding ad valorem percentages of freight charges to 
import values are given in Table IV. 



India's Commodity Balance of Trade 43 

The changes in the weights as we see are not considerable 
and consequently they are not expected to affect the ad valorem 
percentage of freight charges in any way seriously. But the 
case is different with the other two factors to be considered. 

K. L. Dutta's report on Indian prices gives freight quotations 
on all the important commodities imported on Government 

TABLE IV 

WEIGHTS OF REPRESENTATIVE COMMODITY GROUPS AND THE AD 
VALOREM PERCENTAGES OF FREIGHT CHARGES* 

Percentage 

Heavy of Freight 

Year Fabrics Chemicals Commodities Charges 

1898-99 34 2-8 63 4-5 

1899-00 35 2-7 62 4-5 

1900-01 33 2*3 65 4-6 

1901-02 34 2-5 63 4-5 

1902-03 31 2-7 66 4-7 

1903-04 28 2 -4 70 4*9 

1904-05 32 2.2 66 4- 6 

1905-06 34 2-3 64 4-5 

1906-07 27 2*0 71 4-9 

1907-08 30 2*0 68 4-7 

1908-09 30 2-2 68 4-7 

1909-10 29 2- 3 69 4-8 

1910-11 30 2*1 68 4-7 

1911-12 29 2-0 69 4*8 

1912-13 31 i'8 67 4-6 

1913-14 32 i -9 68 4-7 

* Compiled from the Statistical Abstracts for British India. 

account. We assume that these quotations are applicable to 
the imports of similar merchandise on private account. This 
assumption cannot be seriously questioned, as the Govern- 
ment are not reported to receive any special concessions in 
freight rates. Applying these quotations to our representative 
commodity groups we have compiled a weighted index number 
of inward freights. However, these freight quotations are 
available only for the period 1901-2 to 1912-13. For the years 
prior to 1901-2 we shall use the Board of Trade's outward 



44 India's Balance of Indebtedness 

freight index, as has been done by J. Viner when faced with a 
similar difficulty. 1 Then there remains the year 1913-14, for 
which we shall have the Australian freight index, 2 TheVeason 
for selecting Australia and not Canada or any other country for 
supplying us the index of freight rates is quite obvious. Aus- 
tralia lies at the extremity of the same ocean trade Voute which 
connects India with the United Kingdom and the composition 
of her import and export trade and of the shipping engaged in 
it are similar to those of India. The freight indices of the 
Board of Trade and of Australia have been adjusted to the 
Indian fiscal year basis to incorporate them into the Indian 
freight index. The adjustment is made on the assumption of 
equal monthly distribution. All the three indices have been 
readjusted to the average of three years, 1904-5 to 1906-7, 
as the basis and the new index represents the movement of 
inward Indian freight rates during the period of our study. 

As regards the index of prices in Great Britain we shall 
use the Board of Trade's figures. Like the freight index this 
index also has been adjusted to the fiscal year basis and re- 
adjusted to the average of three years 1904-5, 1905-6, and 
1906-7. 

The ad valorem percentage of freight charges to total 
imports as computed in Table IV after making allowance for 
changes in the weights of the representative commodity 
groups, "multiplied for each year by the freight index and also 
by the reciprocal of the price index, will give the ad valorem 
percentage of freight charges to imports for each year in the 
period." The final calculation of freight charges payable by 
India on her imports is presented in Table V. 

The irregular movement of freight rates indicated by the 
freight index is largely due to the prevalence of tramps in the 
Indian Ocean. At the beginning of the twentieth century 

1 J. Viner, Canada's Balance of International Indebtedness, 1900-13, 

P- 74- 

3 G. L. Wood, Borrowing and Business in Australia. 



India's Commodity Balance of Trade 45 

freight rates were unusually high because of the Boer War, 
but they declined sharply after the conclusion of the war 
and did not recover till after 1906.* 

TABLE V 

FREIGHT PAYMENTS BY INDIA 







Percentage 














of Freight 






Percentage 


Freight 




Imports 


Charges 
allowing 


Freight 


Price 


of Freight 
Charges to 


Payments 
by India% 


Year 


Rs. 1,00,000 


for Weights 


Index* 


Index^ 


Imports 


Rs. 1,00,000 


1898-99 


9,072 


4*5 


i,i58 


936 


5'4 


471 


1899-00 


9,702 


4'5 


I,2I2 


949 


5'9 


553 


1900-01 


10,628 


4-6 


1,231 


948 


5*5 


567 


1901-02 


11,021 


4*5 


1,503 


973 


6-6 


706 


1902-03 


1 1, 206 


4'7 


1,368 


979 


6-6 


720 


1903-04 


13,204 


4*9 


1,069 - 


1,001 


5'4 


695 


1904-05 


14,495 


4-6 


1,057 


988 


5*o 


707 


1905-06 


15,497 


4*5 


1,194 


989 


5'4 


818 


I 906-07 


16,298 


4'9 


748 


,023 


3*4 


542 


1907-08 


l8,029 


4*7 


86 1 


,055 


3'8 


671 


1908-09 


15,280 


4*7 


1,234 


,037 


5-6 


838 


1909-10 


16,139 


4-8 


977 


,058 


4*3 


680 


1910-11 


17,477 


4'7 


892 


,097 


3'8 


648 


I9II-I2 


19,895 


4-8 


i,059 


,116 


4*3 


829 


1912-13 


23,013 


4-6 


1,284 


i,i59 


5*0 


1,127 


1913-14 


23,666 


4'7 


i, 43 1 II 


i,i73 


5'6 


1,299 



* 1900-01 to 1912-13 compiled from K. L. Dutta's Report on Indian 
Prices, weighted and adjusted to the average of 1904-05, 1905-06, and 
1906-07. 

f W. T. Layton, An Introduction to the Study of Prices, adjusted to the 
average of 1904-05, 1905-06, and 1906-07 basis. 

J For calculating freight payments the value of re-exports has been de- 
ducted from the total value of imports. 

Compiled from the Board of Trade Freight Index adjusted to the 
Indian Fiscal Year basis and to the average of 1904-05, i9O5-o6,and 1906-07. 

|| Australian Freight Index adjusted to the fiscal year basis and to the 
average of 1904-05, 1905-06, and 1906-07. 



METHOD OF ASCERTAINING INSURANCE CHARGES, ETC. 

In addition to freight charges, insurance and other commission 
charges have also to be deducted from the c.i.f. import values 
before we can strike a pure commodity balance of trade for 

1 The Economist, February 16, 1901, "Commercial History and 
Review of 1900": "Outward freights to the East were most favourably 
affected by the demands of our Government necessitating their paying 
good rates to the Cape for prompt tonnage." 



India's Balance of Indebtedness 

TABLE VI 

INDIA'S COMMODITY BALANCE OF TRADE 
(In lakhs of rupees) 

IMPORTS 



Year 


Commodities* 


Treasure^ 


Total 
Imports 
c.i.f. 
(I + //) 


Freight 
Charges 
on 
Imports^ 


Insurance 
and other 
Commission 
Charges on 
Imports 




I 


II 


III 


IV 


V 


1898-99 


7,282 


1,790 


9,072 


471 


I 3 6 


1899-00 


7,605 


2,097 


9,702 


553 


145 


1900-01 


8,170 


2,458 


10,628 


567 


159 


I9OI-O2 


8,962 


2,059 


11,021 


706 


165 


1902-03 


8,668 


2,538 


1 1, 206 


720 


168 


1903-04 


9,352 


3,852 


13,204 


695 


198 


1904-05 


io,545 


3,950 


14,495 


707 


217 


1905-06 


12,333 


3,l64 


15,497 


818 


232 


1906-07 


11,841 


4,457 


16,298 


542 


244 


1907-08 


13,801 


4,228 


l8,029 


671 


270 


1908-09 


13,007 


2,273 


15,280 


838 


229 


1909-10 


12,388 


3>75i 


16,139 


680 


242 


I9IO-II 


13,504 


3,973 


17,477 


648 


262 


I9II-I2 


14,549 


5,346 


19,895 


829 


298 


1912-13 


16,830 


6,183 


23,013 


1,127 


345 


1913-14 


19,322 


4,344 


23,666 


1,299 


354 


* Supra, 


Table I. f 


Supia, 


Table II. 


J Supra, 


Table V. 



India's Commodity Balance of Trade 

TABLE VI 'continued 

INDIA'S COMMODITY BALANCE OF TRADE 

(In lakhs of rupees) 



47 



IMPORT% 



EXPORTS 



Total 
Freight and 
Insurance 
Charges, etc. 
(IV + V) 


Net 
Imports of 
Commodities 
and Treasure 
(1 1 1 -VI) 


Commodities* 


Treasure] 


T 

Total 
Exports 
(VIII + IX) 


Commodity 
Balance 
of Trade 
(X-VII) 
Credit 


VI 


VII 


VIII 


IX 


X 


XI 


607 


8,465 


II,28o 


741 


12,021 


3,556 


698 


9,004 


10,909 


795 


11,704 


2,700 


726 


9,902 


10,770 


1,423 


12,193 


2,291 


871 


10,150 


12,489 


i,H7 


13,636 


3,486 


888 


I0,3l8 


12,939 


954 


13,893 


3,575 


893 


12,311 


15,352 


i,493 


16,845 


4,534 


924 


13,571 


15,772 


1,653 


17,425 


3,854 


1,050 


14,447 


16,184 


i,546 


17,730 


3,283 


786 


15,512 


17,703 


571 


18,274 


2,762 


941 


17,088 


17,719 


545 


18,264 


1,176 


1,067 


14,213 


I5,3H 


631 


15,945 


i,732 


922 


15,217 


i8,799 


638 


19,437 


4,220 


910 


16,567 


20,996 


712 


21,708 


5,141 


1,127 


18,768 


22,798 


i,037 


23,835 


5,067 


M72 


21,541 


24,622 


1,063 


25,685 


4,144 


1,653 


22,013 


24,901 


708 


25,609 


3,596 



48 India's Balance of Indebtedness 

India. To evaluate these items we shall have to resort to the 
percentage method which we criticize elsewhere. 1 But freight 
rates are determined by factors which are almost independent 
of the value of goods transported. A change in any of these 
factors is likely to affect the freight rate and consequently 
its relation to the value of commodities, ard we show 
that these factors are always in a flux. Moreover, even if 
freight rates remain constant, fluctuations in the prices of 
commodities are sure to affect percentage of freight charges 
to import or export values. In short, a freight percentage is a 
function of two factors which are subject to independent 
changes; and hence it cannot be the same for any two years 
except by accident. In the case of insurance and other com- 
mission charges, however, the situation is different. They are 
mainly related to the values of commodities and the rates are 
quoted as percentages of these values. These rates were more 
or less constant during the period of our study.* Sir Robert 
Giffen in the paper already referred to estimated that insurance 
and other commission charges amounted to 2*5 per cent of 
the value of British exports and imports in the year 1882. 
From careful inquiries this percentage has been reduced to 
i '5 in the case of India.3 Applying this percentage to Indian 
imports we calculate the insurance and other commission 
charges payable on account of commercial services. 

The final calculation of India's commodity balance of trade 
is presented in Table VI. 

1 See Appendix I, p. 195. 

2 The Economist, February 18, 1905, "The Commercial and 
Economic Review. " 

3 League of Nations' Memorandum on Balance of Payments and 
Foreign Trade Balances, 1910-23, vol. i, p. 20. 



CHAPTER II 

BALANCE OF SERVICE TRANSACTIONS 

IN the international transaction of a country, exchange of 
services is as important as the exchange of commodities. Like 
imports and exports of commodities, imports and exports of 
services create debits or credits against it or in its favour. They 
are often overlooked not because of their unimportance in the 
volume of international transactions, but chiefly because 
official statistics are generally limited to the movement of 
physical goods. Service transactions are not recorded by any 
country except Argentina, and this absence of records is 
largely responsible for the confusion that prevails about their 
true character. There still exists a tendency to regard pay- 
ment for services as a payment for nothing. However, we 
consider exchange of services on a par with exchange of com- 
modities as regards their effect on the international trade 
balance of a country. 

In the case of India there is a large amount of invisible 
imports which mainly comprise commercial services. As they 
have to be paid for in the same way as imports of commodities 
we shall deal with them in this section under the following 
headings: freight payments, insurance and banking payments, 
"Home Charges," and tourists' expenditure. Statistical infor- 
mation on all these items except "Home Charges" is either 
very scanty or not at all available. Hence our estimates of 
their value have no claim whatsoever to exactitude. 



FREIGHT PAYMENTS 

Freight payments are payments for the carriage of goods 
from one place to another. Almost the whole of India's sea- 
borne trade, foreign as well as coastal, was carried on British 

D 



50 Indicts Balance of Indebtedness 

bottoms. Even the small tonnage of Indian shipping which 
is now engaged in our coastal trade did not exist during the 
period of our study. Obviously, India had to pay for the services 
of British shipping. However, she was not responsible for the 
payment of these services both on her imports and exports. 
In the case of foreign trade it is generally assumed that a 
country pays freight charges only on its imports. So far as 
coastal trade is concerned, our imports are exports valued c.i.f. 
at the ports of importation. Therefore freight payments may be 
supposed to have been charged either on imports or exports, 
but not on both. In keeping with the practice followed in the 
case of foreign trade we assume that they are charged on our 
imports. Thus on the whole India has to pay freight charges 
only on her imports. 

FREIGHT PAYMENTS ON FOREIGN TRADE 

We have already calculated the total of our freight payments 
on foreign imports. But it was an estimate of gross payments. 
A large part of these receipts must have been spent by the 
British Shipping Companies in India on harbour dues, for 
bunkers, and for the labour of loading and unloading. During 
the post-war year 1923-24 the amount of harbour dues paid by 
these companies was estimated at Rs. 2,00 lakhs. 1 Besides, a 
fairly large number of Indians were engaged by these com- 
panies as sailors and lascars. In the census year, 1911, the 
total number of Indians employed by the British Shipping 
Companies was 2,531: 577 in the Navigation Department, 
1,363 in the Engineering Department, and 591 as cooks, 
stewards, etc.* A major portion of the wages received by them 
is generally spent in India. Similarly British crews during the 
stay of their ships in Indian harbours spend a considerable 

1 League of Nations' Memorandum on Balance of Payments and 
Foreign Trade Balances, 1910-24, vol. i. 

Census of India, Repott, 1911, vol. i, p. 112. 



Balance of Service Transactions 51 

amount of money in India. All this expenditure is ultimately 
met out of the gross earnings of British shipping on India's 
foreign imports, reducing to that extent the net amount of 
freight charges payable by India. In 1882 Sir Robert Giffen 
estimated the proportion of such expenditure at one sixth of 
gross receipts*. On the other hand, C. K. Hobson, by analysing 
the "voyage accounts of two tramp steamers" plying between 
all the important ports of import during the period 1907-6 
to 1908-9, calculates it at 30 per cent. He states, moreover, 
that this percentage may be assumed to remain fairly constant 
from year to year. 1 In view of the large number of British 
ships permanently located abroad since the beginning of this 
century, Sir Robert Giffen's estimate appears to be too low. 
We have therefore assumed Hobson's percentage to be true 
during the whole period of our study and used 'it to make 
deductions from the gross amount of freight charges payable 
by India. 

FREIGHT PAYMENTS ON COASTAL TRADE 

As in the case of freight charges on our foreign trade, there is 
no information whatsoever bearing directly on the freight 
charges payable by India for the carriage of her coastal trade. 
The method generally followed to ascertain these charges is 
based on the reasoning that as our coastal imports are exports 
valued c.i.f. at the port of importation, the excess of imports 
over exports represents freight and insurance charges. This 
argument, however, presupposes that the recorded imports 
of a particular year are the recorded exports of the same year 
valued c.i.f. This may not be necessarily the case. If a large 
consignment of goods is exported from a harbour during the 
third or fourth week of March, the last month of our fiscal 
year for which statistics are recorded, and if the ship takes 

1 Cf. "On the whole, therefore, the assumption appears justifiable 
that the proportion of foreign expenditure abroad is fairly constant 
from year to year." The Export of Capital, p. 173. 



52 India's Balance of Indebtedness 

more than a fortnight to reach its destination, the goods, while 
they will be recorded as exports during that year, will not be 
recorded as imports during the same year. It may even be 
that the recorded exports of a year may never be recorded as 
imports and vice versa. Secondly, if the goods are exported 
to ports under the jurisdiction of the Native States, according 
to the Indian practice of recording trade statistics they would 
appear only on the side of coastal exports, while the exports 
from the Native States to British Indian ports would appear 
only on the side of coastal imports. If the value of exports to 
Native States' ports during a year is much larger than the 
value of imports to British India from there, the total recorded 
imports of that year instead of showing a surplus over the 
total recorded exports of the same year might even show a 
deficiency. In fact, this might have been the case during the 
year 1899-1900, for which the value of coastal imports is 
recorded at Rs. 4,137 lakhs and of exports at Rs. 4,339 lakhs, 
showing an excess of Rs. 202 lakhs over the recorded value of 
imports. A similar difficulty is presented by the figures of 
coastal imports and exports during the year 1897-8, the year 
immediately preceding our period. These difficulties greatly 
affect the applicability of the general method of ascertaining 
freight charges on coastal trade. 

It may also be due to this slight discrepancy in the units 
of period covered by the recorded statistics of coastal imports 
and exports and to the one-sided recording of our coastal 
trade with the ports of the Native States, that the excess of 
imports over exports shows wide fluctuations. The excess of 
imports over exports according to the method we are dis- 
cussing constitutes freight and insurance charges. Therefore 
the fluctuations in the excess represent fluctuations in the 
freight and insurance charges, which are not at all justified by 
the changes in freight rates. 1 The excess of coastal imports 
over exports and the percentage of the excess to the value of 
1 Review of the Trade of India, 1913-14. 



Balance of Service Transactions 53 

coastal imports, in certain years of the period of our study, 

were as follows: 

Excess of Im- 

Coastal Coastal ports over Percentage of 

Imports Exports Exports the Excess to 

Year Rs. 1,00,000 Rs. 1,00,000 Rs. 1,00,000 Coastal Imports 

1902-03 * 4,025 3,824 201 5 

1903-04 4,268 3,924 344 8 

1904-05 4,521 4,4io in 2 

1905-06 5,050 5,009 41 i 

1906-07 5,705 5,335 370 6 

1912-13 6,702 6,434 268 4 

1913-14 7,125 6,308 817 10 

The percentage of the excess, i.e. the percentage of freight 
and insurance charges to the value of imports, seems to have 
been at almost every figure between i to 10 during the period 
1902-3 to 1913-14. It was changing every year except during 
the brief interval of 1906-7 to 1912-13, when it was more or 
less constant, and the changes were very sweeping. The freight 
percentage was 8 in 1903-4. It came down to 2 with a bump 
the very next year. Again in the year 1905-6 the percentage 
figure stood at i but rose to 6 in 1906-7. Such abrupt changes 
in the freight percentage, in spite of very slight variations in 
the coastal freight rates 1 and in the character of freights earned, 
are sufficient in themselves to discredit the method of cal- 
culating the freight charges which equate these to the excess 
of coastal imports over exports. 

Mr. S. N. Haji has used another method to calculate the 
freight bill payable by India on her coastal trade. 3 For the 
year 1921-22, to which his calculations refer, Haji ascertains 
the average freight rates per ton for the main commodities 
carried along the Indian coast. From these various averages he 
obtains an all India average. Multiplying the total amount of 
cargo carried coastwise by this average freight rate he finally 
arrives at the earnings of British shipping engaged in Indian 

1 Review of the Trade of India, 1913-14. 
a S. N. Haji, Economics of Shipping, p. 320. 



54 India's Balance of Indebtedness 

coastal trade. However, the data obtained by Haji for the 
year 1921-22 are not available for the period of our study and 
hence his method cannot be made use of by us. 

Therefore, in the absence of a method which can give a 
reliable estimate of our freight charges on coasjtal trade we 
have had resort to a very rough calculation. Though coastal 
imports during a year may not necessarily be the coastal exports 
of the same year valued c.i.f., it may fairly be assumed that the 
total amount of coastal imports during a long period of years 
do represent the total of coastal exports during the same period 
valued c.i.f. The longer the period the lesser the percentage 
of error creeping into the estimate due to a portion of exports 
not being recorded as imports within a given period and a 
portion of recorded imports being really the exports of a year 
preceding the period. The excess of total imports over total 
exports may then be assumed to give an approximate measure 
of the total amount of freight charges paid by India during 
the period as a whole. During 1898-99 to 1913-14 the total of 
India's coastal imports amounted to Rs. 84,536 lakhs, while 
the value of exports was Rs. 80,140. The excess value of 
imports which comes to Rs. 4,390 lakhs represents freight 
and insurance payments by India. This total of freight and 
insurance bill has got to be distributed over individual years 
to ascertain India's annual debits on that score. For this we 
work out the percentage of total freight and insurance charges 
to the total value of coastal imports and apply it for individual 
years. Obviously the results are subject to a small margin of 
error due to the assumption of a constant percentage relation 
between import values and freight charges every year while in 
fact this might have been changed because of divergent varia- 
tions in freight rates and import values. The variations, how- 
ever, were not so large as to upset rough calculations. 

We see, then, that freight and insurance charges together 
on India's coastal trade amount to 5 per cent of the coastal 
imports. Professor Findlay Shirras has estimated 15 per cent 



Balance of Service Transactions 55 

of the freight and insurance charges as payment for finance, 
insurance, and other commission charges. 1 By using his estimate 
we calculate the percentage of pure freight charges to import 
values as 4-25. 

This agaijj is an estimate of the gross earnings of British 
shipping engaged in India's coastal trade. C. K. Hobson has 
already calculated that 30 per cent of the gross earnings of 
British shipping engaged in foreign trade were spent abroad. 
But this is an average percentage based upon the expenditure 
of British ships and crew during all sorts of voyages, including 
long voyages with only temporary halts in foreign ports. 
Obviously the percentage of expenditure to gross earnings is 
bound to be higher in the case of ships permanently located 
abroad and which ply between foreign ports only. The British 
ships carrying on the coastal trade of India must be spending 
a large part of their earnings in purchasing provisions and in 
paying the wages of the crew which is mostly Indian. "In 
this respect, then, the coasting trade is similar to a firm or an 
exchange bank doing business in India and what is transferred 
to England is only the profits of the trade. "* Unfortunately, 
however, we have not the slightest information available to 
ascertain the percentage of these profits to gross earnings. 
Taking into consideration that the ships engaged in coastal 
trade stay much longer in Indian harbours than the ships 
engaged in foreign trade, it can be assumed that about 60 per 
cent of their earnings are spent in India. This is a purely 
arbitrary figure and perhaps errs on the conservative side. 
But on the whole the error resulting from this assumption 
will form an insignificant percentage of the volume of Indian 
balance of indebtedness and hence may be ignored. 

Professor Findlay Shirras in the paper on "India's Real 
Balance of Trade in 1922-23," which he read before the seventh 

1 G. F. Shirras, "India's Real Balance of Trade," Proceedings 
of the Seventh Indian Economic Conference, p. 73. 
* G. F. Shirras, op. cit., p. 77. 



Indicts Balance of Indebtedness 



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Balance of Service Transactions 57 

Indian Economic Conference, seems to have unconsciously 
ignored the debits to India on account of freight and insurance 
charges on coastal trade. He says: "The expenditure for 
shipping services and commissions has not been included in 
the Balance* of Trade Statement in the final computation, 
because under section 30 of the Indian Sea Customs Act the 
Indian Import Returns include freights and insurance/' 1 This 
reasoning is quite correct so far as our foreign trade is con- 
cerned ; but it cannot be applied to coastal trade also, which is 
a branch of the domestic trade. Insurance and freight charges 
payable by India on her foreign trade appear in the balance 
of her international transactions along with the imports which 
are valued c.i.f. The coastal imports, however, are not included 
in our international transactions and hence freight and in- 
surance charges payable on our coastal trade do not figure 
in the balance sheet. Therefore these payments should be 
separately included in the final computation of India's Balance 
of Trade Statement. 

Table VII represents the net amount of freight charges 
payable by India during 1898-99 to 1913-14. 

INSURANCE AND BANKING PAYMENTS, ETC. 

Marine Insurance 

The earnings of foreign insurance and banking companies 
constitute an important item in the balance sheet of India's 
international debits and credits. Most of these companies are 
branches of British companies registered in Great Britain. In 
1882 Sir Robert Giffen calculated the earnings of these con- 
cerns at 2-5 per cent of the total of Great Britain's import 
and export trade. Professor Findlay Shirras after careful 
inquiries has brought down the estimate for India at i 5 per 
cent: 0-5 per cent for insurance charges, 0-25 per cent for 
banker's commission and bill stamps, and 0-75 per cent for 
other minor charges.* In the absence of any direct information, 
1 G, F. Shirras, op. cit, p. 73. * G. F. Shirras, op., cit., p. 78. 



58 India's Balance of Indebtedness 

we have used this estimate to calculate India's insurance pay- 
ments on her imports. For coastal trade also Professor Shirras 
has calculated that 15 per cent of the gross amount of freight 
and insurance charges constitute insurance and banking 
payments. Pure insurance payments form one- third of the 
latter. On this basis the actual percentage of insurance charges 
to coastal imports works out at 0-25. The earnings of the 
foreign fire and life insurance companies in India are not 
taken into account, first, because they cannot be estimated 
even indirectly and, secondly, because they are insignificant 
as compared with the total volume of our indebtedness. 

PROFITS OF THE EXCHANGE BANKS 

"Exchange Banks" is the name applied to foreign banks who 
have monopolized the financing of India's foreign trade. 
Almost all of them are branches of larger concerns registered 
in Great Britain whose operations extend to many other parts 
of the world. In 1898-99 the number of such banks transacting 
business in India was eight, which increased to twelve at the 
end of our period. Of these the Chartered Bank of India, 
Australia, and China, the National Bank of India, the Mer- 
cantile Bank of India, and the Eastern Bank are said to have 
been doing a considerable part of their business in India. 1 
The main items of their business are : 

(i) Dealings in foreign exchange, 
(ii) Discounting and rediscounting of internal bills, 
(iii) Agency Work. 

Dealings in foreign exchange are the most important source 
of profit to the Exchange Banks. Taking out the element of 
interest from the composite payment they demand from 

1 Indian Central Banking Enquiry Committee, Majority Report^ 



Balance of Service Transactions 59 

importers and exporters there remains a balance which repre- 
sents charge for the service of changing money from one 
currency into another. It is suspected that this charge is 
levied on the whole of our foreign trade and not on the 
difference between the import and export operations transacted 
by the banks. 1 In fact, it is only for this difference that they 
come into the market for more bills or more remittance. 

The margin between the deposit rates and the discount 
rates indicates the profits of the Exchange Banks in dis- 
counting internal bills. It is a patent fact that these banks 
receive deposits in India at lower rates of interest than the 
Indian Joint-Stock Banks. It is also equally patent that their 
discount rate is higher than the bank-rate in India. In most 
other countries it is lower than the bank-rate. The profits 
earned by the Exchange Banks in discounting internal bills in 
India may naturally be expected to be considerably high. 
Moreover, by rediscounting in London at lower rates the 
export bills discounted in India on the basis of Indian money 
rates which arc higher, they earn an additional handsome 
commission. 

In addition, Exchange Banks make money "by undertaking 
agency work, purchase of sterling securities by Indians, general 
remittance work, letters of credit, and rents from bank ware- 
houses. They handle the bulk of what may be called the 
invisible imports of India, and they make profits out of the 
movement of permanent capital to India, the withdrawal of 
capital and the transfer of income on such capital." They 
are also said to have been earning large profits by managing 
imports of gold and silver bullion, which was their monopoly 
for a long time and which even now accounts for a large part 
of their income. Government remittances even are suspected 
to be a source of their profits. 

Though the profits earned by the Exchange Banks from all 

1 Indian Central Banking Enquiry Committee, Minority Report, 
p. 214. 



60 India's Balance of Indebtedness 

branches of their business in India are considered to be very 
high, statistical information on this subject is absolutely 
lacking. First, there is no way of knowing the amount of 
capital employed by the Exchange Banks exclusively in India ; 
and secondly, there is no information about the rate of profits 
earned by them on purely Indian business. Even the Indian 
Central Banking Enquiry Committee, which reported only 
recently, could not gather any useful data about the position 
of these banks in India. Hence to ascertain their approximate 
earnings resort must be had to a very rough calculation. 

As to the proportion of the Foreign Banks' capital employed 
in this country the Government of India in a letter to the 
Secretary of State, dated June 13, 1901, wrote: "It is im- 
possible to fix what this proportion may be, but there is 
reason to believe that considerably less than one-half of the 
capital of these banks could be made quickly available in 
India to meet special demands. "* During 1901 to 1913 four 
new banks were opened in India. Being new to the field of 
their operations they cannot be expected to have a large pro- 
portion of their total capital with them. We assume that 
about 25 per cent of the total capital of the Exchange Banks 
was employed in India during the period of our study. Similarly, 
the system recently adopted by the Commercial Intelligence 
Department for the classification of these banks suggests that 
three of them had a considerable proportion of their business 
in India. The average of the profits earned by these three 
banks may therefore be taken as a rough measure of the profits 
earned by all the banks. But even here the data are incomplete. 
Information about the rates of dividend declared by only two 
of the three important banks is available and it also does not 
cover all the years of our period. The dividend declared by 
the National Bank of India was 12 per cent per annum for 

1 No. 199, dated June 13, 1901, from the Government of India 
to the Secretary of State. Quoted in the Minority Report of the Indian 
Central Banking Enquiry Committee, p. 155. 



Balance of Service Transactions 61 

eight years up to 1912 and 16 per cent for 1913, while the 
dividend declared by the Chartered Bank was 14 per cent for 
twelve years up to 1918, free of income tax. 1 Thus from 1904 
to 1906 we have only the rate of dividend declared by the 
National Bank of India, and we assume it to represent the 
rate of profits earned by all the Exchange Banks. From 1910 
onwards the rate of profits will be represented by the average 
of the rates of dividend declared by the National Bank and the 
Chartered Bank. In the absence of any information relating 
to the years prior to 1904 the dividend declared by the National 
Bank in 1904 is assumed to represent the average rate of 
profits. Accordingly, for all the years up to 1906 the average 
rate of profits will be 12 per cent, from 1906 to 1912 it will 
be 13 per cent, and for 1913 it will be 15 per cent. 

Payments on account of other minor services in connection 
with the movement of goods between India and other countries, 
according to Professor Findlay Shirras, amount to 0-75 per 
cent of the value of imports. This comes to one-half of all the 
payments, exclusive of freight charges. On this basis the value 
of minor services performed by foreign agencies in connection 
with our coastal trade amounts to o 37 per cent of the coastal 
imports. 

The estimates of the insurance, banking, and other minor 
payments by India are presented in Table VIII. 

"HOME CHARGES'* 

"Home charges" represent the expenditure incurred by the 
Secretary of State for India in England. The main heads of 
the expenditure are: establishment of the Secretary of State, 
recruitment of persons for civil and military employment in 
India and their pensions, purchase of stores and railway 
construction materials, and interest on India's sterling debt. 
All this expenditure is borne by India and it constitutes an 
1 Indian Central Banking Enquiry Committee, Minority Report, 
P- 143- 



6a India's Balance of Indebtedness 







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Balance of Service Transactions 63 

important debit item in the balance sheet of her international 
transactions. Here, however, we shall consider the India 
Office expenses and the charges for the diplomatic services in 
Persia and China, payments in connection with the Civil 
Departments in India, payment for the management of the 
debt, and the Army and Marine effective charges which 
represent a payment for services rendered to India. Interest 
charges are discussed elsewhere. 

INDIA OFFICE EXPENSES AND THE CHARGES FOR THE DIPLOMATIC 
SERVICES IN PERSIA AND CHINA 

The India Office expenses include the salaries of the Secretary 
of State for India, Under- Secretaries, members of the India 
Council, and heads of various departments, and other sundry 
payments. The charges for diplomatic services in Persia and 
China were on account of contributions made by India to the 
expenses of the Mission in Persia and of His Majesty's Estab- 
lishments in China which were maintained for Imperial pur- 
poses. On the recommendation of the Welby Commission, 
the Indian payment for the diplomatic services in China 
ceased in 1901 and that for the Persian Mission in 1905. 
After 1905, therefore, no payment was made by India on this 
account. 

PAYMENTS IN CONNECTION WITH CIVIL DEPARTMENTS IN INDIA 

India has annually to pay large subsidies for telegraphic and 
mail services overseas. Till 1908 she had to pay nearly three 
lakhs of rupees every year to make good the losses on the 
Red Sea Telegraph Line constructed in 1858. An alternative 
telegraph communication between India and England via the 
Cape and the Mauritius was established in 1890. It is now 
known as the Zanzibar Mauritius Cable. India had to pay a 
subsidy of Rs. 150,000 a year on account of this Cable 
Service. There were also other subsidies payable by India for 
mail services in the Persian Gulf, for mail services between 



64 India's Balance of Indebtedness 

India and England and for the telegraphic service controlled 
by the Indo-European Telegraph Department. All these 
services are extensions of the Inland Postal and Telegraphic 
Service and hence payments for them are called as payments 
in connection with the Civil Departments in India. 

PAYMENT FOR THE MANAGEMENT OF THE DEBT 

Almost every year the Government of India has to appear in 
the London Money Market to borrow money. They carry out 
these loan transactions through the Banks of England and 
Ireland, who are their London agents and who perform all 
the necessary services in that connection. It is through these 
London agents, too, that payment of interest and repayment 
of loans are made. For this agency work the Banks of England 
and Ireland receive some remuneration from the Government 
of India. In the year 1913-14 it amounted to Rs. 9 lakhs. 

THE ARMY AND MARINE EFFECTIVE CHARGES 

India has annually to remit to the War Office the cost of 
recruiting and training British soldiers for her. Besides, since 
the introduction of the " Short- Service' ' system she has had to 
contribute to the grant of "Deferred Pay" which is offered 
as an inducement to British persons to join the Army. The 
British soldiers in India at the end of their tenure of service 
which is ordinarily fixed at five years for the officers and 
seven years for the privates are sent back to England and 
fresh ones are imported. This country had to bear the whole 
cost of their transportation before 1900. But since then, on the 
recommendation of the Welby Commission, the British Govern- 
ment has been contributing Rs. 19-5 lakhs towards this cost. 
The payment of marine effective charges during the period 
of our study was governed by Lord Rosebery's Award. 
According to it India had to pay Rs. 15 lakhs to the Admiralty, 
besides bearing the local expenses of the squadron engaged 
for the protection of her trade and for general naval defence. 



Balance of Service Transactions 65 

In Table IX figures of net total amount of these payments 
are reproduced from the Statistical Abstracts for British India. 



PAYMENTS ON 


TABLE IX 
ACCOUNT OF "HOME 
(In lakhs of rupees) 


CHARGES*" 






Payments in 








India 


Connection 


Payment 


Net Army 




Office 


with Cwil 


for the 


and Marine 


Year 


Expenses 
fc.f 


Departments 
in India 


Management 
of "Debt" 


Effective 
Charges^ 


1898-99 


24 


19 


7 


I8 3 


1899-00 


24 


24 


6 


I6 3 


1900-01 


25 


21 


7 


153 


I9OI-O2 


27 


25 


6 


29 


1902-03 


36 


30 


6 


159 


1903-04 


36 


25 


6 


117 


1904-05 


34 


27 


6 


104 


1905-06 


36 


24 


6 


78 


I 906-07 


3i 


27 


7 


107 


1907-08 


34 


24 


7 


118 


1908-09 


36 


19 


9 


162 


1909-10 


33 


18 


9 


144 


I9IO-H 


33 


21 


10 


158 


I9II-I2 


42 


22 


9 


H5 


1912-13 


33 


22 


9 


i53 


I9I3-H 


36 


25 


9 


150 



Total 
233 
217 
206 

87 
231 
184 
171 
144 
172 
I8 3 
226 
2O4 
222 
2l8 
217 
220 



* Compiled from the Statistical Abstracts for British India. 
t Include India's contribution for His Majesty's Establishments 
in China till the year 1901, and for the Persian Mission till 1905. 
J After deducting military receipts in England. 



TOURISTS' EXPENDITURE, ETC. 

The money spent by foreign tourists in India forms a credit 
item in her international transactions, while a similar expen- 
diture by Indian travellers abroad constitutes a debit item. 
About the expenditure of foreign tourists in India no infor- 
mation whatsoever is available for the period of our study. 
On the other hand, the expenditure of Indian students reading 
in foreign universities, who formed the most numerous class 
of Indian visitors to Europe and other countries, amounted to 





66 India's Balance of Indebtedness 

about 30 lakhs of rupees a year. 1 The remittances to foreign 
travellers in India and to Indian students abroad are, however, 
made either through the Post Office or through the Exchange 
Banks whose transactions we have considered elsewhere. 



TABLE X 

BALANCE OF PAYMENTS FOR SERVICES EXCEPT INTEREST CHARGES 
(In lakhs of rupees) 



Total 

(Debit) 

823 

904 

933 

906 

1,050 

,034 

,059 

>i37 

,010 

,160 

,270 

,162 

,201 

,534 
,673 



* Supra, Table VII. t Supra, Table VIII. * 

J Supra, Table IX, does not include interest charges. 

Therefore, inasmuch as the expenditures of foreign tourists 
in India and of Indian students abroad were met by these 
remittances they have already been accounted for. 

The net debits to India on account of the import of services 
excepting the services of capital are given in Table X. 

1 T. Morrison, The Economic Transition in India, p. 192. 







Insurance, 






Freight 


Banking and 






Payments 


other Minor 


Home 


Year 


by India* 


Charges^ 


Charges]. 


1898-99 


392 


198 


233 


I 899-00 


457 


230 


217 


1900-01 


479 


248 


206 


1901-02 


570 


249 


87 


1902-03 


572 


247 


231 


1903-04 


559 


291 


184 


1904-05 


572 


316 


171 


1905-06 


659 


334 


144 


1906-07 


476 


362 


172 


1907-08 


582 


395 


183 


1908-09 


687 


357 


226 


1909-10 


572 


386 


204 


1910-11 


554 


425 


222 


1911-12 


683 


461 


218 


1912-13 


903 


414 


217 


1913-14 


1,030 


423 


220 



CHAPTER I I I 

BALANCE OF NON-COMMERCIAL TRANSACTIONS 

NON-COMMERCIAL transactions are a part of the "invisible" 
items figuring in the balance sheet of a country. Tributes or 
indemnities, pensions and allowances payable abroad, charities, 
settlers' effects, immigrants' and emigrants' remittances, and 
the capital taken out by them at the time of departure are a 
few of the items coming under this category. They are non- 
commercial in the sense that the movement of goods on their 
account is one-sided in character, requiring no off-setting 
payment in the opposite direction. However, like all other 
transactions they do affect the balance of international credits 
and debits. The French indemnity of 1873, the remittances 
of immigrants 1 in America during the pre-war times, and the 
post-war flood of American charities 2 to Europe were in their 
time sufficiently large to upset the trade balances of the countries 
concerned. In recent years the payment of reparations has 
been the greatest factor affecting the trade of Germany. 

Non-commercial remittances by aliens in India are made 
either through Money Orders and British Postal Orders or 
by means of other financial documents. Naturally, provision 
must be made in foreign countries for the cashing of these 
documents in either of the two ways or by both : by exporting 
additional goods and/or by reducing the imports. Therefore, 
non-commercial transactions which involve payments by 
Indians to persons abroad affect the commodity balance of the 
trade of India, either by increasing the exports or by reducing 
the imports or in both ways simultaneously. In any case, they 

1 C. F. Speare estimates $250,000,000 as the amount remitted by 
the foreign immigrants in United States of America during the year 
1907. North American Review, January 1908, p. 109. 

* F. W. Taussig, International Trade, p. 322. 



68 India's Balance of Indebtedness 

bring about an excess of exports. Similarly, non-commercial 
transactions involving payments to India from foreign countries 
increase the imports or decrease the exports and thus bring 
about an excess of imports over exports. Settlers' effects, 
however, which move with their owners without money being 
used at any stage, in no way affect the balance of international 
credits and debits. We have already made allowance for this 
factor in dealing with the commodity balance of trade. There- 
fore the items which we have to evaluate in striking the 
balance of non-commercial transactions for India are: first, 
monetary capital brought in by immigrants and taken out 
by emigrants ; second, remittances by aliens in India to their 
relatives in the Home Country and by Indians abroad to their 
relatives at home, remittances by Indians to their relations 
abroad and conversely by aliens to their people here, and, 
third, remittances of pensions and allowances payable abroad. 

IMMIGRANTS' CAPITAL 

Statistical information about immigration to India is extremely 
scanty, it is non-existent so far as emigration is concerned. 
However, some details about the movement of coolies from 
India to various colonies and back are available, and it is 
possible to form a rough estimate of the capital brought in 
by coolie immigrants. 

The "colonial emigration" 1 from India during the period 
of our study was controlled by legislation. It was based on 
what is known as the "indenture" system. According to this 
system the emigrating Indian labourer in consideration for a 
wage and the cost of his passage undertook to leave India 

1 Under the Emigration Act XXI of 1883 an Indian emigrant is 
one who goes by sea under contract to labour for hire to some country 
other than Ceylon and the Straits Settlements. These countries are 
excepted on account of their proximity and of the similarity of their 
general conditions to those of India. The emigration under this Act 
is in other terms styled "Colonial Emigrations." Moral and Material 
Progress Report, 1890-92, p. 209. 



Balance of Non-Commercial Transactions 69 

and serve his master in a distant colony for a fixed period which 
varied from one month to five years. On the termination of 
his contract he had the option to renew the contract or to 
settle in the colony and work as he pleased, or to return to his 
motherland at the expense of the colony which imported him. 1 
In this fashion the employer could secure a sufficient supply 
of labour for a maximum period at a minimum cost. The 
labourer who agreed to the terms of the contract was generally 
very poor, having no resources in India even for bare main- 
tenance. From the time of his recruitment all his expenses 
were borne by the importing colony,* where on landing he 
was entitled to receive a regular wage. Under these circum- 
stances it is difficult to suppose that the labourers emigrating 
from India to colonies according to the indenture system carried 
any substantial amount of monetary capital with them. 

In the case of immigrants the situation was altogether 
different. They were the emigrant labourers who had stayed 
in a colony for some years and earned regular wages. Moreover, 
as we have said before, the emigrants at the expiration of their 
agreement were free to take up other employments. Many of 
them settled in the colonies permanently, acquired land or 
engaged in retail trading and miscellaneous occupations.3 

1 National Bureau of Economic Research, International Migrations, 
vol. ii, p. 597. 

* Moral and Material Progress Report, 1901-2, p. 320. 

3 Census of India, 1911, p. 97. In Natal there has been a great 
deal of permanent settlement, and of the total number of Indians 
enumerated there nearly half were born in the colony. Many of these 
have forgotten their native language and now talk only English. But 
it is in Mauritius that the process of colonization has made most 
headway. The introduction of Indian coolies to work the sugar 
plantations dates from the emancipation of the slaves, three-quarters 
of a century ago, and from that time onwards many of the coolies 
who have gone there have made the island their permanent home. 
Though it now contains only 35,000 persons who were born in India, 
the total number of Indians is 258,000, or about 70 per cent of the 
whole population. A large part of the land is now owned by Indians and 
they are dominant in commercial, agricultural, and domestic callings. 



yo India's Balance of Indebtedness 

Available evidence goes to prove that those who stayed on in 
this manner prospered and did much better in life than they 
could have done by returning to India. The figures in Table XI 
show the total resident Indian population indentured and 
free in the chief labour-importing colonies, and their savings 
per head during the years 1900-1 and 1910-11. 



TABLE XI* 

RESIDENT INDIAN EMIGRANTS IN THE CHIEF LABOUR 
COLONIES AND THEIR SAVINGS PER HEAD 



IMPORTING 



Colony 


Indian 
Population 
in 1900-01 


Savings 
per Head 
in 1900-01 
Rs. as. ps. 


Indian 
Population 
in 1910-11 


Savings 
per Plead 
in 1910-11 
Rs. as. ps. 


British Guiana. . 


1,32,984 


33 


6 





Trinidad 


.. 85,615 


17 


12 


O 


1,07,433 


17 


H 


o 


Mauritius 


. . 2,65,163 


13 


4 


O 


2,59, 


975 


89 


o 


o 


Natal . . 


. . 65,925 


23 


3 


O 


1,08, 


694 


16 


6 


o 


Fiji 


. . 15,368 


19 


13 


O 


39, 


3H 


6 


3 





Jamaica 


.. 15, 


278 


23 


H 





15, 


415 


80 


4 


o 


Surinam 


.. 18, 


ooo 


26 


3 


O 


27, 


358 


19 


5 





Demerara 


- r >25, 


875 


21 


10 


O 













St. Lucia 


I, 


20O 


23 


13 
















Martinique 


3> 


764 


O 


8 
















Guadeloupe 


. 15, 


276 


2 


12 

















Total .. 6,11,464 . 6,91,173 

* Compiled from the Moral and Material Progress Reports, ^1*901-2 
and 1911-12. 

The figures of savings are necessarily incomplete and they are 
not all comparable with one another. In all cases they include 
bank deposits and amounts remitted by emigrants to India, 
but the Fiji figures for savings banks represent only deposits 
made during the year, while in other cases the total amount 
held in deposit in the banks is shown. For the year 1900-1 
the value of landed and other property in the possession of 
emigrants is also' included in the figures of savings per head, 
while for the year 1910-11 it is included only in the figures 



Balance of Non-Comniercial Transactions 71 

for British Guiana, Mauritius, Jamaica, and Surinam. The 
residents of British Guiana, Mauritius, Natal, Jamaica, and 
Surinam seem to have been better off than others. Natives of 
India and their descendants constituted 70 per cent of the total 
population of Mauritius in 1910-11 and owned landed pro- 
perty to the estimated value of Rs. i8,ooo,ooo. x In regard to 
remittances made to India by money orders the emigrant 
population of Natal easily stands first. The amount remitted 
from that colony in the year 1911 was about Rs. 1,050,000, or 
on an average Rs. 9-6-0 for every resident Indian. Remittances 
from Fiji averaged about Rs. 1-3-0, while in the case of other 
colonies the average was less than 12 annas per head. 

These residents, when they returned to India, could 
naturally be expected to have brought an appreciable amount of 
monetary capital. Even the regular wage-earners who turned 
back to the Mother Country soon after the expiration of their 
contracts, which extended from five yearsjo ten years, may be 
credited with large savings. Figures for the monetary capital 
brought in by the immigrant coolies landing at Calcutta can 
be gleaned from the Moral and Material Progress reports. 
From these data we work out the per capita amount of monetary 
capital brought in by the coolies arriving at Calcutta and 
apply their average to the rest of their kind. There cannot 
be any serious objection to this procedure. First, because 
since the year 1904-5 the coolie emigrants landing at Calcutta 
formed a large percentage of total coolie emigrants returning 
to India, Secondly, the emigrant labourers landing at Calcutta, 
Bombay, or Madras did not come from any one colony but 
from all the colonies, and hence the average per capita amount 
of monetary capital brought in by the emigrants at any of these 
ports will be largely representative of the rest. The estimates 
prepared on this basis for the whole period under study are 
presented in Table XII. 

The figures for monetary capital brought into India as far as 
1 Moral and Material Progress Report, 1911-12, p. 374. 



72 India s Balance of Indebtedness 

they go may be approximately correct. But colonial immi- 
gration is only a fraction of total immigration into India from 
the outside world. Similarly with emigration. Again, no data 
about the total annual volume of immigration and emigration 

TABLE XII* 
CAPITAL BROUGHT IN BY THE COOLIE IMMIGRANTS 



Year 

1898-99 
i 899-00 
1900-01 
1901-02 
i 902-03 
1903-04 
1904-05 
1905-06 
1906-07 
1907-08 
1908-09 
1909-10 
1910-11 
1911-12 
1912-13 
I9I3-H 



* Compiled from the Moral and Material Progress Reports. 

f All the immigrants did not bring savings to India. 

J See Appendix II for the per capita savings brought by immigrants 
from different colonies. In calculating the per capita brought in by 
these immigrants no account has been taken of those immigrants 
who did not bring in any savings. 

are available. The census reports record the number of immi- 
grants arriving in India during the census years, but say nothing 
about emigration. The data are so scanty that even indirect 
methods cannot be used to ascertain the inflow and outflow of 
population every year. Still, in general terms it can be said that 
a majority of immigrants into India come from Asiatic countries, 





Per Capita 


Total Capital 




Amount of 


Brought in by 


Coolie 


Capital 


the Coolie 


Immigrants^ 


Brought in\ 


Immigrants 




Rs. 


Rs. 


5,689 


129 


7,33,983 


9,484 


159 


15,08,061 


7,006 


139 


9,62,992 


10,623 


210 


22,65,830 


12,757 


183 


23,04,123 


n,673 


167 


19,48,264 


6,341 


174 


11,05,851 


6,945 


173 


11,96,006 


8,i97 


1 60 


13,08,910 


6,774 


177 


12,03,474 


7,918 


1 80 


14,19,780 


6,909 


171 


11,82,528 


5,788 


154 


8,91,394 




155 




4,641 


197 


12,15,047 


5>28 4 


1 80 


9,55,440 



Balance of Non-Commercial Transactions 73 

especially from across the Nepal Frontier. Of the Nepalese 
enumerated in India in the year 1911 a considerable number 
were sepoys in the Army, and in military police battalions, and 
their dependants. Many of them were engaged in breeding 
buffaloes, making ghee, or working as sawyers in the Govern- 
ment forests of Assam. 1 Most of the Chinese immigrants, 
whose number is swelling every year, are found in Burma, 

TABLE XIII 

IMMIGRANTS FROM OUTSIDE INDIA AT THE CENSUS YEARS 
1891, 1901, AND 1911 
IMMIGRANTS FROM 





I 


II 


III 


IV 






Other 




Other 




Contiguous 


Asiatic 


United 


European 


Year 


Countries 


Countries 


Kingdom 


Countries 


1891 


4,60,616 


60,988 


97,921 


7,148 


1901 


3,65,441 


160,708 


96,653 


7,930 


1911 


3,80,135 


124,978 


122,919 


9,049 






IMMIGRANTS 


FROM 






V 


VI 


VII 


VIII 


Year 


America 


Africa 


Australia 


Total 


1891 


2,325 


n,565 


503 


6,41,066 


1901 


2,069 


8,293 


646 


6,41,740 


I9II 


2,760 


10,270 


1,267 


6,51,378 



where they are in demand as shoe-makers and carpenters. 
Immigrants from Europe and America find remunerative jobs 
ready for them in India. In the year 1911 the total number of 
immigrants recorded from outside Asia was 146,265. Of these 
131,968 came from Europe, the United Kingdom alone 
claiming 122,919. Of the British-born, 77,626 were serving in 
the Army and the rest were absorbed by railways and industrial 
concerns. 2 The number of immigrants in India at the three 
census years 1891, 1901, and 1911 is represented in Table XIII 
according to the country of immigration. 

1 Census of India, Report, igu, vol. i, p. 96. * Ibid., p. 97. 



74 Indicts Balance of Indebtedness 

A cursory glance at these figures brings two important facts 
to our notice. In the first place immigrants from the United 
Kingdom during the decade 1901 to 1911 showed a large 
increase and, secondly, the figure for total immigrants was 
more or less constant for all the three years. These data, 
however, are extremely scrappy to form the basis of an esti- 
mate of the annual flow of immigration. So far as the volume 
of emigration is concerned even guesswork is not possible. 
Moreover, we could not find any reference anywhere to the 
probable amount of monetary capital brought in and taken out 
by immigrants and emigrants respectively. Obviously in the 
absence of such fundamental data it is impossible to calculate 
even approximately the amounts of monetary capital brought 
in and taken out by immigrants and emigrants respectively. 
But on general grounds it can be stated that as most of the 
immigrants come to India in search of employment, and as 
most of the emigrants are immigrants returning to their home 
countries after a period of highly remunerative service in 
India, the net balance on account of the movements of monetary 
capital accompanying the migrants in either direction will be 
a debit item. This is especially the case with European immi- 
gration and emigration, which is most important to India so 
far as the transfer of monetary capital is concerned. 



MEANS OF REMITTANCE FROM INDIA 

Even though we have not been able to ascertain separately 
the net debit or credit balance on account of the monetary 
capital brought in and taken out by immigrants and emigrants, 
it is possible to calculate approximately the balance of non- 
commercial transactions as a whole. The transfer of money 
from one country to another, whether it be the capital of a 
departing immigrant or emigrant or the remittance by a 
resident of one country to his friends or relatives in the other, 
as effected either through a bank or by a money order. In the 



Balance of Non-Commercial Transactions 75 

case of India there is a third way of sending money and that 
is by the purchase of British postal orders. Remittances of 
pensions and allowances payable abroad are effected by means 
of Council Bills. The illiterate or otherwise ignorant immi- 
grants from the contiguous Asiatic countries and the Indian 
emigrants to the colonies for the most part make use of the 
facilities afforded by the Post Office. Foreign money orders 
to and from the United Kingdom, most of the British colonies 
and possessions, foreign European countries, and most of 
their colonies and possessions, and Egypt are issued in sterling, 
payments being made by the remitters and to the payees in 
India at the rates of exchange fixed by the Post Office from 
time to time for this purpose. 1 On the other hand, European* 
immigrants and their relatives at home effect remittances 
through the British Exchange Banks and other foreign banks 
having branches in India. Remittances to Indian students 
studying in the United Kingdom are also generally made in 
this fashion. If we take account of all the media of transfer 
issued and paid in India by these agencies the resultant will 
closely represent the net balance of non-commercial transactions 
for India. 

FOREIGN MONEY-ORDER TRANSACTIONS 

There are available for India statistics of postal money orders 
issued in India and payable in other countries. All these 
money orders, however, do not represent non-commercial 
remittances from India. About 50 per cent of the amount goes 
to cover small business transactions. This figure is based on 
the value of articles imported by post in the year 1898-99 as 
a percentage of the total amount of postal money orders issued 
in India and payable abroad during the same year. The actual 
percentage works out a little higher. 2 But we have made some 

1 Annual Report of the Posts and Telegraphs, 1893-94, p. 17. 
a " In 1898-99 the value of articles imported by post was 
Rs. 33,42,000, while the value of foreign orders issued and British 



76 India's Balance of Indebtedness 

allowance for the transactions settled through the Exchange 
Banks which were just beginning to make headway. We further 
assume that this percentage remained more or less constant 
during the period 1898-99 to 1913-14. Admittedly these 
assumptions rest on a somewhat slender basis : 

(i) In the first place the value of foreign money orders 
issued in India increased at a very slow rate during 
the period of our study. 1 

(ii) Secondly, the number of European immigrants in 
India increased by over 30,000 during the decade 
1901 to 1911. 

(iii) Thirdly, the value of articles imported by post also 
increased fast, so much so that it over-balanced the 
value of foreign money orders issued and British 
Postal Orders purchased every year since 1905.* 

(iv) Lastly, the business of the Exchange Banks in regard 
to private remittances showed a remarkable progress 
during the period. 

The slow rise in the value of foreign money orders issued 
in India, in spite of an addition of 30,000 to the number 
of European immigrants residing in India, to whom a large 
share of the total remittances from India is usually credited, 
indicates that the Post Office did not find favour with them as 
an agency for the transfer of money. On the other hand, the 
progressive remittance business of the Exchange Banks simul- 
taneously with the increase of European immigrants and the 
overwhelming increase in the total value of articles imported 
by post suggests that the remittances by the immigrants and 

postal orders purchased was Rs. 49,00,000. Therefore the actual 
percentage of commercial remittances to the total value of foreign 
money orders issued to British postal orders purchased in India comes 
to sixty-seven. 

' Vide Table XIV. 

a Review of the Trade of India> 1931-32. 



Balance of Non-Commercial Transactions 77 

the payments for the articles imported by post were made 
through the Exchange Banks. Moreover, as we have already 
stated, the postal money orders were a favourite means of 
remittance with the illiterate and ignorant immigrants who 
did not know the technicalities of the procedure of the Exchange 
Banks. The earnings of this class were not very large and 
hence the value of foreign money orders issued in India did 
not show any substantial increase. 

BRITISH POSTAL ORDERS 

Money can also be transferred to countries outside India by 
means of British postal orders. These orders are sold in India 
at the Post Office for a small commission and can be remitted 
to the United Kingdom and other British colonies where alone 
they are payable. However, they were not very popular with 
the people during the period of our study, nor were they en- 
tirely non-commercial in nature. The percentage of the value 
of commercial foreign money orders to the value of total 
foreign money orders issued in India may be applied here 
also. In addition, since October i, 1905, these orders were 
made payable in India, and like inland money orders were 
used for local remittances. 1 Therefore the value of such orders 
paid in India, along with those remitted to settle commercial 
transactions, must be deducted from the total value of orders 
sold in India to arrive at the value of non-commercial remit- 
tances effected through them. All the necessary information 
on this account is available in the Annual Report of the Posts 
and Telegraphs. 

Just as in the case of foreign money orders issued in India 
and British postal orders purchased a percentage of their 
value has been attributed to commercial transactions already 
accounted for in the commodity balance of trade, similarly 
some allowance must be made for commercial remittances 
in the case of foreign money orders payable in India. Here 
1 Annual Report of the Posts and Telegraphs, 1905-6, p. 18. 



78 India's Balance of Indebtedness 

the allowance will be based on the actual percentage which 
the value of articles exported from India by post bore to the 
total value of foreign money orders payable in India. First, 
because the values of individual parcels exported by post 
were small enough to be paid by money orders and, secondly, 
their total value was always smaller than the value of foreign 
money orders payable in India. In the case of foreign money 
orders issued in India and articles imported by post both 
these conditions were exactly opposite. 1 The value of com- 
mercial money orders calculated in this manner amounted 
approximately to 30 per cent of the total value of foreign 
money orders payable in India, 2 which will have to be sub- 
tracted from the latter in calculating the balance of non- 
commercial transactions. 

THROUGH FOREIGN MONEY ORDERS 

Lastly, before arriving at the final balance of non-commercial 
money-order transactions we have to deal with the value of 
"through foreign money orders/* "Through foreign money 
orders" are defined as money orders issued by one foreign 

1 Jewellery, precious stones, gold and silver thread, cigarettes and 
cinematograph films are the most important articles imported in India 
by post. The large amounts payable by India on account of these 
articles can be judged from the value of diamonds alone imported 
by post for the following years : 

Rs. 

1920-21 = 14,60,000 
1921-22 = 15,00,000 
1922-23 = 132,00,000 

League of Nations' Memorandum on Balance of Payments and 
Foreign Trade Balances y 1910-23, vol. ii, p. 319. 

2 Foreign Money Articles Percentage 
Orders Payable Exported of 

in India by Post II to I 

Year 1 II Approximate 

lakhs lakhs 

1898 89 27 30 

1908 192 48 30 

1913 374 112 30 



Balance of Non-Commercial Transactions 79 

country for payment in another foreign country, the payment 
being made through India as an intermediary. 1 When these 
money orders are received by India from the foreign country 
of issue they are regarded as equivalent to inward foreign 
money orders. The credits to India on this account are the 
amount of the money orders plus a half per cent commission, 
and are put under the heading of foreign money orders paid. 
When the sums are sent by India to foreign countries of pay- 
ment, they are regarded as equivalent to outward foreign 
money orders. The debits against India on this account are 
the amounts of the money orders minus a commission. The 
sums are put under the heading of foreign money orders 
issued. 

From the definition of "through foreign money orders" 
and the manner in which their accounts are recorded, it follows 
that the difference between the sums credited and debited to 
India on account of "through foreign money orders'* should 
be equal to the one-half per cent commission on the inward 
"through foreign money orders/* plus a varying commission 
on the outward "through foreign money orders/* 2 In fact, 
however, the difference between the two as calculated from 
the Statistical Abstract for British India (Postal Tables) and 
the Annual Postal Reports is much larger than can possibly 
be explained on this hypothesis.3 For instance, the value of 

1 Posts and Telegraphs Manual^ vol. 6, Appendix C, p. 517. 

* Ibid., p. 579. 

3 The difference is calculated as follows : 

Neither the Statistical Abstracts nor the Postal Reports give separate 
figures for through foreign money orders. The Postal Reports even 
do not mention the term. The Statistical Abstracts from 1921-22 
to date, however, refer to them indirectly. The figures for foreign 
money orders paid and issued given in the Abstracts are reference 
to footnotes taken to exclude through foreign money orders. Hence 
up to 1920-21 the figures given in the Statistical Abstracts and in 
the Annual Postal Reports tally. But from 1921-22 they too differ. 
Therefore, if on the basis of this evidence as well as of an absence 
of indications to the contrary, we assume that the figures in the 



8o India's Balance of Indebtedness 

"through foreign money orders" issued by India during the 
year 1921-22 was Rs. 4,22,172, while that of the "through 
foreign money orders" paid to India was Rs. 7,52,153. The 
difference of Rs. 3,29,981 obviously cannot be explained as 
due to commission charges, which form only a very small 
percentage of the total value of "through foreign money 
orders" issued and paid in India. 1 We have not as yet been 
able to find any explanation of this discrepancy between the 
recorded statistics and our theoretic calculations, which are 
apparently based on correct principles. However, since the 
figures of "through foreign money orders" involved in our 
calculations are insignificant relatively to the total trade of 
India we have thought it proper to ignore them. 

Table XIV represents the balance of non-commercial 
remittances effected by means of foreign money orders and 
British postal orders. 

REMITTANCES THROUGH EXCHANGE BANES 

As said before, remittances are also made through banks. 
Naturally their value will be included in this account only so 
far as they relate to non-commercial transactions. But infor- 

Annual Postal Reports include those for all types of foreign money 
orders including through foreign money orders then for the years 
1921-22 onward the difference between the figures in the Postal 
Reports and the Statistical Abstracts should be a measure of the 
amounts of through foreign money orders. 

1 The wide gap between the sums credited and debited to India 
on account of "through foreign money orders'* can be seen from the 
following figures: 

Values in lakhs of rupees 

Year Credits Debits 

1921-22 7 4 

1922-23 3 3 

1923-24 3 3 

1924-25 2 8 

1925-26 3 8 

1926-27 5 i 8 

1927-28 9 17 



Balance of Non-Commercial Transactions 81 



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82 India's Balance of Indebtedness 



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mation about such remittances is extremely scanty to enable 
us to form any independent estimate. Mr. H. F. Howard, 
formerly the Controller of Currency in India, has, however, 
prepared a rough estimate of the debits to India on this account. 1 
According to one of the Exchange Banks the net debit balance 
to India on account of non-commercial remittances to and 
from India made through banks is about Rs. 15,00,000- 
Rs. 18,00,000 per mensem. Howard assumes the smaller 
amount at the beginning of the period of our study and 
gradually increases it to the higher of these figures at the end. 
In the absence of any other estimate or the necessary data 
we assume these figures to be approximately correct and 
adopt them in our study. 

Information about remittances of pensions and allowances 
has been taken from the Statistical Abstracts for British India. 

The total balance of non-commercial remittances effected 
through banks and by means of foreign money orders and 
British postal orders is presented in Table XV. 

1 Report on the Operations of the Currency Department, the Move- 
ment of Funds, and on the Resource Operations of the Government of 
India for the year 1913-14, Appendix I, p. 53. 



CHAPTER IV 

INDIA'S BALANCE OF INDEBTEDNESS 

THE difference between all the credit and debit obligations of 
India, immediate as well as deferred, represents her balance 
of indebtedness. It is equivalent to the difference between her 
foreign borrowings and foreign loans. So far we have taken 
into account India's international credits and debits on account 
of commodity transactions, service transactions excepting 
interest payments and non-commercial transactions. But 
there are certain items which could not be appropriately in- 
cluded under either of these categories and which, accordingly, 
have escaped reckoning. To ascertain the balance of indebted- 
ness which represents the difference between all the credits 
and all the debits, those items in our international balance 
sheet which have escaped computation so far will be considered 
here in the following order: 

Councils and Reverse Councils. 

Cash Balances and Reserves of the Secretary of State. 

Railway Annuities and Sinking Fund. 

India Bills. 

Movement of Securities. 

Miscellaneous Deposits and Remittances. 

Interest Payments. 

COUNCILS AND REVERSE COUNCILS 

Councils, or the Council Bills as they were properly termed, 
were the bills drawn by the Secretary of State on India. They 
were sold in London for sterling and are generally cashed at 
the Indian treasuries in rupees. In certain cases, when they were 
specifically drawn either against the Paper Currency Reserve 
or the Gold Standard Reserve, they were paid from the portions 



India's Balance of Indebtedness 85 

of these reserves kept in India. Reverse Councils, on the other 
hand, were bills drawn on the Secretary of State for India 
and payable in London in sterling. 

Normally, the commodity balance of trade is favourable to 
India. Every year she has to receive payments from abroad 
for the surplus of her exports over imports. On the contrary, 
the Secretary of State for India has to make payments in 
London on account of Home Charges. These payments are 
to be made in sterling while the Indian Revenue to which they 
are charged is collected in rupees. Therefore, taking advantage 
of the normally favourable commodity balance of trade and 
the consequent demand for bills on India, the Secretary of 
State sold " Councils" and got command over funds in London 
to meet his liabilities. The bills were offered in London for 
tender at the Bank of England every Wednesday morning and 
there was a reserve price below which no tender was accepted. 
The purchasers remitted the bills to India, where on pre- 
sentation to the Treasury they were cashed out of the accumu- 
lated surplus of rupees, and the claims of the Indian exporters 
were satisfied. Whenever the Indian bank-rate was high, the 
Secretary of State for India sold " Telegraphic Transfers" 
instead of Council Bills. By means of these Telegraphic Trans- 
fers rupees could be obtained in India almost as soon as the 
sovereigns were paid into the Secretary of State's account at 
the Bank of England. In effect, therefore, the "Council Bills" 
and the " Telegraphic Transfers" were the means of trans- 
ferring funds from India to London and vice versa, which 
saved the Government of India the extra expenditure on the 
export of gold to London, so as to purchase the amount of 
sterling necessary to honour their debit obligations in Great 
Britain. They also brought a small commission to the Secretary 
of State for India for dealing in foreign exchange, which other- 
wise would have been secured by the London banks. 

Till the year 1900 the volume of "Council Bills" drawn by 
:he Secretary of State was mainly governed by the amount 



86 Indicts Balance of Indebtedness 

required to defray the Home Charges. Since 1900, however, 
the functions of the Council Bill system were enlarged and for 
the rest of the period of our study it played a very important 
part in the maintenance of the Gold Exchange Standard. 1 
Sales of Council Bills during this period were determined by 
the necessity of maintaining the is. 4d. ratio. 

How are these Council Bills to be accounted in the balance 
sheet of India's international transactions? Are they to be 
considered as debits because they represent a payment for the 
surplus of our exports, or are they to be considered as credits 
because they represent a transfer of funds from India to 
London? As we have already said, Council Bills are only 
a means of transmitting funds. However, they perform a 
double transaction. When the Councils are sold by the Secre- 
tary of State the proceeds of the sale represent credits to India. 
But when the bills are cashed through the Treasury in India 
they become a debit item. If, therefore, the Council Bills are 
to be included in the balance of India's international trans- 
actions they may be considered both as credits and debits or 
they may be excluded altogether. The following passage from 
the Report of the Controller of Currency, 1913-14, is 
enlightening on this point: 

The remittances which the Indian Government have to make 
to England to meet their liabilities in the United Kingdom on 
account of interest and other charges are usually effected by the 
sale by the Secretary of State of bills and telegraphic transfers on 
India. These bills, etc., represent two transactions, namely, a 
remittance to England by the Government of India and a corre- 
sponding remittance to India by the purchaser of bills. The 
relationship between these remittances and the other private trans- 
actions can be represented in the form of a simple equation : 

C - D + S, 
where C represents the private credits on account of exports, etc., 

1 J. M. Keynes, Indian Currency and Finance, p. 106. 



Indicts Balance of Indebtedness 87 

D the debits including imports, etc., and S the Secretary of State's 
drawings by which payment is made for the balance of credits not 
set off by the imports of merchandise, specie, etc. In a similar 
equation to show the Government transactions, S representing an 
export of funds from their point of view may appear on the other 
side of the account and we should have 



where C represents credits and D the debits on account of Govern- 
ment. The two equations can obviously be combined into one, thus: 

C + c4 S = D + d + S 
or eliminating S, 

C + c = D + d. 

That is to say, the Government and private transactions can be 
presented in a single equation, and the Secretary of State's drawings, 
which "when this is done represent merely a book transaction, can 
be eliminated from the joint account. 

The Reverse Councils are sold in India and are payable in 
sterling in London. This process, which is the opposite of that 
involved by the Council Bills, gives them their name. However, 
in their effect on the balance of our international transactions 
they are on a par with the Council Bills. 

CASH BALANCES AND RESERVES OF THE SECRETARY OF STATE 

The discussion about the real nature of transactions effected 
by means of the Council Bills leads us to the consideration of 
the credits and debits of India managed by the Secretary of 
State. His balance sheet in any year includes: 1 

Receipts 

(i) Net debt incurred. 

(ii) Council Bills. 
(iii) Gold Remittances from India. 
(iv) Other miscellaneous deposits and remittances. 

(v) Opening Balance. 

1 See footnote on next page. 



88 India's Balance of Indebtedness 

Disbursements 

(i) Net Home Charges payable. 

(ii) Capital expenditure in England, 
(iii) Reverse Councils, 
(iv) Purchase of silver. 

(v) Closing balance. 

The Council Bills and the Reverse Councils we are alto- 
gether omitting from the balance of India's international 
transactions because they represent two opposite transactions. 
The rest of the credit and debit items enumerated above, 
except the withdrawals and additions to the Treasury and 
other reserves of the Secretary of State, are considered else- 
where in the course of this study. Now, therefore, the point 
is whether these withdrawals and additions to the balances of 
the Secretary of State be included or not in the balance sheet 
of India's international transactions, and if they are to be 

NOTE TO PAGE 87. J. M. Keynes arranges the balance sheet of the 
Secretary of State as follows : 

PAYMENTS 

Home charges x 

Gold "Earmarked/* or securities bought for Currency Reserve 

in London y 

Cost of silver profit on coinage credited to Gold Standard 

Reserve in London z 

Expenditure on stores in London for capital purposes in India v 

Transfer of cash balances from India to London . . . w 

Total payments = x y z v w. 

RECEIPTS 

Council Bills cashed from balances in India x u v w 
Council Bills cashed from rupees in Cur- 
rency Reserve in India . . . . y 
Council Bills cashed from new coinage . z 

Total Council Bills drawn . . . . x y z u v w 
Net Capital Borrowings . . . . u 

Total Receipts in London =x+y+z+vw 



Indicts Balance of Indebtedness 89 

included what is their significance. In taking account of India's 
international credits we have considered all the remittances 
from India to the Secretary of State on Government account 
as credits. However, such remittances, whether made in gold 
or by means of the Secretary of State's drawings, have per se 
no more effect on the international transactions of India than 
the transfer of funds from one Treasury in India to another. 
"What is material is the extent to which they have been 
actually employed in meeting debits raised against the Govern- 
ment of India in England, and how far any portion of them is 
still in hand." 1 Accordingly, the part of the remittances which 
remains after all the debits in England are paid for and which 
consequently swells the reserves and the cash balances of the 
Secretary of State cannot be considered as a credit to India. 
Therefore the inclusion of the entire amount of Government 
remittances under "credits" has unduly increased their volume 
to the extent that they added to the reserves and the cash 
balances of the Government in England. As a set-off against 
this over-estimate the annual net increase in the reserves and 
the cash balances of the Secretary of State will be considered 
as a debit to India. On the other hand, when the remittances 
of the Government and the loans raised in England are not 
sufficient to pay off the debits of the Secretary of State, he 
has to draw upon his reserves and the cash balances. Naturally, 
to the extent that he draws upon these reserves his credits 
increase. These credits, however, are so far left unaccounted 
for, with the result that the total of our receipts on inter- 
national account represents an under-estimate. It can be 
corrected by adding the amount of annual net withdrawals 
from the Secretary of State's reserves and cash balances to the 
credit side of India's international transactions. 

The credits and debits to India on account of alterations in 
the Secretary of State's reserves and cash balances are pre- 
sented in Table XVI. 

1 Report on the Operations of the Currency Department) 1913-14, p. 50. 



9 



India's Balance of Indebtedness 



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Indicts Balance of Indebtedness 91 

RAILWAY ANNUITIES AND SINKING FUND 

Payments on account of Railway Annuities and Sinking Fund 
are in the nature of capital repayments. The first railways in 
India, including some of the more important systems, were 
constructed through the agency of foreign joint-stock com- 
panies under contracts with the State. According to these 
contracts the railway companies received a guarantee of 5 per 
cent on their capital outlay with half the surplus profits besides, 
while the State retained the option of purchasing the railways 
after a certain period. Whenever opportunity to exercise this 
right presented itself, it was readily taken up, with the result 
that the State became the owner of Indian railways in course 
of time. The purchases were effected under an arrangement 
by which the bulk of the price was paid by annuities, a portion 
of the balance being discharged by the creation of India Stock, 
which was gradually to be cancelled by annual sinking-fund 
purchases. For example, the contract with the East Indian 
Railway came to an end in 1879. The Company's share was 
valued at 125 per 100. Accordingly, its purchase price 
amounted to 32,750,000, which is being paid by means of a 
terminable annuity of 1,473,750 payable till I953. 1 In two 
cases new company stock was issued in exchange for a portion 
of the annuity. 2 The whole amount of these annuity and sinking- 
fund charges are paid out of the railway revenues and as such 
constitute a debit item in India's international transactions. 

INDIA BILLS 

To tide over a temporary period of inadequate receipts, the 
Secretary of State for India borrows funds by means of India 
Bills. Such borrowings are either redeemed or funded shortly 
after their flotation. In either case the balance of India's 

1 C. N. Vakil, Financial Developments in Modern India, p. 230. 
* H. F. Howard, India and the Gold Standard, p. 83. 



92 India's Balance of Indebtedness 

international indebtedness is affected in reverse directions in 
the years of flotation and redemption or funding respectively. 
Therefore in the year of flotation such loans are considered 
as credits to India and in the year of redemption or funding 
they are considered as debits. Though the India Bills issued 
and redeemed by the Secretary of State represent movements 
of capital to and from India because they are very small and 
because their effect on India's balance of indebtedness is can- 
celled within a very short period of time, they are considered 
here separately from the larger movements of capital considered 
elsewhere. 

MOVEMENT OF SECURITIES 

In their effect on the balance of India's credits and debits 
the private remittances of securities must be differentiated 
from the remittances of money. 1 The money remitted from 
India constitutes a debit item. But if somebody in India sells 
an Indian security to a person residing in a foreign country 
the transaction counts in the international trade as a means of 
discharging an international liability. On the other hand, the 
remittances of such securities to India from abroad create a 
liability against her. This is equally true in the case of Indian 
Government paper enfaced in India for payment of interest in 
England and vice versa, subject to the qualification that if 
an Englishman in India saves money and invests it in such 
paper, and when returning to England gets the paper enfaced 
and takes it with him, the transaction does not affect the 
international account of the year one way or the other. Subse- 
quently, however, when interest on such paper falls due a 
debit arises against India. The net credits and debits on account 
of the movement of Government securities are therefore 
included in striking the balance of India's international 
obligations. 

1 H. F. Howard, op. cit., p. 83. 



India's Balance of Indebtedness 93 

MISCELLANEOUS DEPOSITS AND REMITTANCES 

These include the unrecorded exports on Government account 
and a number of adjustments with the Home and Colonial 
Government on account of the postal department, etc., not 
included in the "Home Charges." The shipment of stores in 
vessels chartered by Government do not figure in the statistics 
of Indian sea-borne trade as the vessels do not clear at the 
Customs. "In this way during the South African War and the 
China Expedition great quantities of material escaped record; 
much of this having been sold to the British Government 
represented a true commercial transaction affecting the balance 
of trade. "* Credits to India on this account should have been 
properly included under commodity transactions. But in the 
absence of separate figures it could not be done. However, 
H. P. Howard has prepared an estimate of the value of such 
exports along with the credits qnd debits to India on account 
of the postal department, etc. for money-order remittances 
sent to India from South Africa and elsewhere, which are 
honoured by the Indian Government in India, that Government 
being paid in London. As the credits and debits to India on 
account of the foreign money-order remittances have already 
been considered in the balance of non-commercial transactions, 
the adjustments with the Home Government on that account 
need not be considered again. Besides, the value of such 
adjustments is very small. Therefore, for the sake of this 
study, we accept H. F. Howard's estimate of the Miscellaneous 
Deposits and Remittances to be credited or debited to India 
without any allowance. 

Table XVII represents the balance of India's credits and 
debits on account of railway annuities, India Bills, Movement 
of Securities, and the Miscellaneous Deposits and Remittances. 



1 Report on the Operations of the Currency Department, 1913-14* 
p. 48. 



94 







India's Balance of Indebtedness 



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India's Balance of Indebtedness 95 

PRELIMINARY BALANCE OF INTERNATIONAL INDEBTEDNESS 

We have now estimated the value of all classes of India's 
international transactions except interest payments on the 
amount of foreign capital invested in the country. The balance 
of India's international indebtedness in each year represents 
the net borrowing or lending of capital or the difference 
between its borrowings and loans. During the pre-war period 
the proverbially shy Indian capital is not known to have been 
seeking investment in foreign countries. Hence, if we tabulate 
all the items in our international transactions so far con- 
sidered and strike balances between the credit and the debit 
items for each year during 1898-99 to 1913-14, the resulting 
figures would represent for each year the amount of foreign 
capital invested in India in that year minus the interest pay- 
ments by India in that year on the total amount of foreign 
capital invested in India at the end of the preceding year. The 
results of this calculation are given in Table XVIII. 

INTEREST PAYMENTS BY INDIA 

The preliminary balance of indebtedness presented in 
Table XVIII represents the annual foreign borrowings of 
India minus the interest payments. If, therefore, we can reach 
an estimate of the interest charges payable by India every year 
during the period of our study it is quite possible to ascertain 
the actual amount of our foreign borrowings. To form an 
estimate of the interest charges payable by India, information 
on two points is necessary. Firstly, the total amount of foreign 
interest-bearing capital invested in India at the beginning of 
the period, i.e. at the beginning of the year 1898-99. Secondly, 
the rate of interest paid on the foreign capital invested in 
India before 1898-99 and the rates of interest paid for the 
subsequent years of our period. The sterling debt of India, 
which represents the foreign capital imported on Government 
account, stood at Rs. 18,490 lakhs in the beginning of the 



96 



India's Balance of Indebtedness 



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India's Balance of Indebtedness 97 

year 1898-99, interest payments on which amounted to 
Rs. 582 lakhs annually. The total amount of non- Government 
borrowings at the beginning of the period was Rs. 20,863 
lakhs, including private capital. 1 

About the rate of interest charged on the non- Government 
borrowings of India no reliable data are available. R. A. 
Lehfeldt, 2 from a careful study of the primary records, obtained 
the following average rates of interest at which "large"3 
colonial fixed income stocks were issued in Great Britain. 

AVERAGE RATE OF RETURN ON LARGE COLONIAL INVESTMENTS ISSUED 
TO PAY A FIXED RATE OF INTEREST 

Year Per cent Year Per cent Year Per cent 

1899 3-27 1904 3-78 1909 3-96 

1900 3-20 1905 3-78 1910 4-19 

1901 3-40 1906 3-85 1911 4-03 

1902 3-21 1907 3-99 1912 4-30 

1903 3'2i 1908 4-04 1913 4-44 



These averages relate to bond and preferred stock flota- 
tions, but do not include common stock issues. Lehfeldt, 

1 According to H. F. Howard's estimate the amount of British 
capital publicly invested in India on non- Government account was 
Rs. 21,150 lakhs at the end of 1910. Subtracting from this Rs. 8,653 
lakhs, the amount of capital publicly invested in India from 1898 to 
1910, we get Rs. 12,497 as the total amount of capital publicly invested 
in India at the end of 1897-98. According to Edgar Crammond the 
total British private investments abroad amounted to 27 per cent of 
its public investments in Government and non- Government securi- 
ties. Taking this percentage to be true in the case of India we get 
Rs. 8,366 lakhs 27 per cent of Rs. 30,897 lakhs the total of British public 
investments in India at the end of 1897-98 as the total amount of 
foreign capital privately invested in India at the end of 1897-98. 
Hence the total of foreign non- Government public capital and private 
capital invested in India at the beginning of the period of our study 
is calculated to be Rs. 20,863 lakhs. 

R. A. Lehfeldt, "The Rate of Interest on British and Foreign 
Investments/' 76. Journal of the Royal Statistical Society, 1912-13. 

3 Issues of cash value exceeding 900,000. 

G 



98 India's Balance of Indebtedness 

however, discovered in the course of his study that common 
stock issues were only 10 per cent of the total British invest- 
ments in large issues and that the percentage was lower still 
if only the investments outside Great Britain were taken into 
account. Hence the accuracy of these averages as far as they 
go suffers only slightly by the exclusion of common stock 
issues. In the year 1902 the average rate of return on large 
fixed-income Indian Stock was 2-95 per cent, lower than the 
average of all colonial fixed-income issues by 0-26 per cent. 
This suggests that the average rates of interest on colonial 
fixed-income issues obtained by Lehfeldt are a little higher 
than what they might have been for India alone. But as against 
this, there is the consideration that the average rate of interest 
on India Stock represents an average of the rates of interest 
on Government and non- Government borrowings. Govern- 
ment loans, however, are floated at lower rates of interest than 
the non-Government loans and, as such, the average rates on 
colonial fixed-income issues may approximately represent the 
rates charged on Indian non- Government issues. In the 
absence of better information, we ignore the fact that according 
to Lehfeldt the Indian non- Government issues were for the 
most part of the "medium" 1 category, while the averages of 
rates of interest quoted above refer to "large" issues and make 
use of them to estimate the interest charges payable on the 
foreign non- Government borrowings of India after 1898-99. 
Similarly, though Lehfeldt's average rates of interest are 
higher than the rates at which Government loans were raised 
in London, to facilitate the use of the method described in the 
following paragraph for ascertaining India's balance of in- 
debtedness, we apply them also to the Government borrowings 
after 1898-99. Allowance for the error resulting from the 
application of higher rates of interest will be made in the 
next chapter. Taking into consideration that the interest rates 
were at an unusually low level in the last decade of the nine- 
1 Issues whose cash value was between 100,000 and 900,000. 



India's Balance of Indebtedness 99 

teenth century, we take 3 per cent to be the approximate rate 
of interest paid by India on the total amount of her non- 
Government borrowings effected prior to 1 898-99.* 

At 3 per cent the interest paid by India on Rs. 20,863 lakhs, 
the total of her non- Government borrowings in the beginning 
of 1898-99, amounted to Rs. 625 lakhs. In the same year the 
amount of interest charges paid on Government account was 
Rs. 582 lakhs. As against this, India received a small sum of 
Rs, 4 lakhs on the investments of the Secretary of State's 
reserves and cash balances in London. Therefore the total of 
net interest charges paid by India in 1898-99 works out at 
Rs. 1,207 lakhs. Table XVIII represents India's balance of 
indebtedness for each year, but with interest payments un- 
accounted for. Subtraction of the preliminary credit balance 
of India in 1898-99 from the interest payments by India for 
that year will as a result give us the amount of foreign capital 
invested in India in that year. In the calculation of interest 
payments for each subsequent year there must be included 
the interest on foreign capital invested in India from the 
beginning of 1898-99 to the end of the year preceding. The 
"net" 2 investment of foreign capital in India in each year 
during the period of our study can then be ascertained by 
adding as debits the net interest payments by India during 
the corresponding year to the preliminary balances of indebted- 
ness worked out in Table XVIII. 

The annual net interest payments by India and the annual 

1 In the year 1898 the average rate of interest earned by large 
Colonial fixed-income issues was 3 07 per cent. However, the course 
of interest was declining until the middle of the last decade of the 
nineteenth century. Therefore the interest earned by the investments 
made prior to 1898 can be reasonably expected to be lower than 
3*07 per cent. We have taken it exactly at three for the sake of 
convenience. 

Cf. Viner's Canada's Balance of International Indebtedness , 1900- rj, 
p. 99. 

a I.e. the excess of new investments over liquidation of old 
investments. 



100 



India's Balance of Indebtedness 



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India's Balance of Indebtedness 101 

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BALANCE 


TABLE XX 
OF SERVICE TRANSACTIONS 
(In lakhs of rupees) 

Insurance, Balance 
Banking, of Service 




Freight 


and 


Transactions 




Payment 


Other 


Net (I + II -Mil 




by 


Minor 


Home Interest 


+ IV) 


Year 


India* 


Charges^ 


Charges J Paymen ts 


(Debit) 




I 


II 


III IV 


V 


1898-99 


392 


198 


233 


,203 


2,026 


i 899-00 


457 


230 


217 


,213 


2,117 


1900-01 


479 


248 


206 


,251 


2,184 


1901-02 


570 


249 


87 


,295 


2,201 


1902-03 


572 


247 


231 


,320 


2,370 


1903-04 


559 


291 


184 


,34i 


2,375 


1904-05 


572 


316 


171 


,372 


2,431 


1905-06 


659 


334 


144 


,406 


2,543 


906-07 


476 


362 


172 


,505 


2,515 


1907-08 


582 


395 


183 


,568 


2,728 


1908-09 


687 


357 


226 


,695 


2,965 


1909-10 


572 


386 


204 


,729 


2,891 


1910-11 


554 


425 


222 


,829 


3,030 


1911-12 


683 


461 


218 


,825 


3,187 


1912-13 


903 


414 


217 1,893 


3,427 


I9I3-H 


1,030 


423 


22O 1,964 


3,637 


* 


Supra, Table 


VII. 


t Supra, Table VIII. 




t 


Supra, Table 


IX. 


Supra, Table XIX. 





published in the Financial Statistics of British India for interest 
charges on the total amount of Government borrowing prior 
to 1898. For the Government and non-Government borrowings 
after 1898 we have made use of Lehfeldt's average rates of 
interest on colonial fixed-income issues, and the estimate of 
3 per cent is used for the non-Government borrowings effected 
before 1898-99. 



IO2 India's Balance of Indebtedness 

In striking the balance of India's credits and debits foreign 
capital investments in India is the only item for which we 
have not made a direct estimate. But an indirect estimate of 
the amount of such investments has been reached on the 
assumption that all the immediate obligations, credit as well 
as debit, balance each other every year, and that any debit 
surplus remaining after all the credits have been set off against 
all the debits represents the debit obligations whose settlement 
was postponed, that is, foreign capital investments in India. 
"By this method the estimate of the final balance when pre- 
sented will bear an unearned air of exactitude." 1 If on the 
other hand direct evidence about the amount of foreign capital 
invested in India bears out even approximately the estimate 
reached here, it may be regarded as a satisfactory verification 
of the calculations made in this chapter, including the estimates 
for all the other items'. An attempt at such verification is made 
in the next chapter. 

As we have calculated the interest charges payable by 
India every year, the partial balance of service transactions 
presented in Chapter II can now be completed (Table XX). 

The Final Balance of India's International Indebtedness is 
presented in Table XXI. 

1 J. Viner's Canada's Balance of International Indebtedness, Jpoo jj, 
p. 102. 



India's Balance of Indebtedness 



103 



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CHAPTER V 

CAPITAL INVESTMENTS IN INDIA 
A VERIFICATION 

BY a roundabout process we have arrived at the probable 
amount of capital invested in India during the period 1898-99 
to 1913-14. The calculation is based on the assumption that 
the immediate debit and credit obligations of a country balance 
one another during a year. No abstruse argument is needed to 
justify this assumption. When, therefore, all the items except 
foreign investments 1 entering into the balance sheet of India 
have been evaluated, the excess of debits or credits revealed 
must naturally be due to net foreign borrowing or lending. If 
we can now secure a direct verification of this indirect estimate 
of foreign capital investments in India during the period of 
our study, we shall incidentally construct an effective test of 
the accuracy or otherwise of the values assigned to the in- 
visible items. In the following pages we make such an attempt. 

STATISTICS OF INTERNATIONAL INVESTMENTS 

During the pre-war period almost all the capital imported 
for the development of this country was received from Great 
Britain. There is a considerable amount of statistical data 
relating to the investment of such capital in India. But while 
handling the statistical information one has to be cautious. In 
the first place much of the available information is of question- 
able accuracy, and that which can be considered as accurate 
fails to cover the entire period of our study. Besides, statistics 
of foreign investments display certain characteristic features 

1 C. K. Hobson defines foreign investments as that part of the 
property of a country and its inhabitants which is situated abroad 
and from which its owners expect to derive an income. Export of 
Capital, p. i. 



Capital Investments in India A Verification 105 

which make it difficult, if not impossible, to arrive at an 
accurate and complete estimate of such investments in India. 
For certain classes of investments statistical information cannot 
be secured at all. 

So far as Great Britain's public investments in India are 
concerned, there are some reliable compilations, but they 
relate only to a few stray years. There is scattered information 
on this point available in the issues of the Economist for the 
whole period of our study. However, in using the compilations 
made even by reliable and competent authorities and in pre- 
paring new ones a certain amount of caution is necessary. 
First, the term "public investments" is applied to all the 
capital investments made through the issue of securities for 
public sale after advertisement in financial journals. These 
securities are almost invariably issued through brokers and 
agents in the capital market. It is, therefore, essential to know 
whether the compilations of sugh issues refer to nominal or 
par values or are based on the actual issue prices of the 
securities, as the results obtained for common shares will 
differ appreciably according to the method used. For fixed- 
income securities and common stock, compilations based on 
issue price are preferable for our present purpose, which is to 
ascertain India's balance of indebtedness during the pre-war 
period of the gold-exchange standard. On the other hand, in 
the case of bonds and debenture stocks, par values can be 
used in preference. For share securities, which do not involve 
any contractual obligation about the repayment of the principal 
at some definite future date, it is debatable which method of 
compilation will yield reliable and satisfactory results. Never- 
theless, in order to ascertain the actual flow of capital into 
India we have followed Viner, 1 and used issue price for all 
classes of securities except the Government and Railway 
securities whose nominal value alone is recorded in the 
Financial Statistics of the Government, which form an im- 
1 J. Viner, op. cit., p. 109. 



io6 India's Balance of Indebtedness 

portant source of our information. From the issue price we 
have also deducted the shares of the vendor and the promoter. 

Secondly, when a loan is simultaneously floated in different 
countries the total issue may be recorded in the compilations 
of all the markets. So also, when a loan is raised in one 
country a part of the securities might subsequently travel to 
another country through private dealings on the Stock Exchange 
and may figure in the estimates of one country as public invest- 
ments and of another as private investments. In both these 
cases the amount of a country's borrowings is likely to be 
greatly exaggerated. However, the magnitude of Indian 
indebtedness in particular will not be seriously affected by these 
duplications in the statistics of international investments. 
First, because we know that almost all of our foreign obliga- 
tions are held by Britishers. Our loans in the pre-war period 
were opened for subscription only in the London Money 
Market. Secondly, the published statistics of foreign invest- 
ments in India relate only to public investments, so that even 
if a portion of one country's public investments in India re- 
appeared as the private investments of another, the fact would 
not affect the true estimate of India's foreign borrowings. 

Thirdly, a confusion between the amount of loans authorized 
and the amount actually issued provides a further source of 
error. At times, if an issue is under-subscribed, the unsub- 
scribed part is withdrawn and reissued on better terms for 
the investor. The double inclusion of the reissued part in 
such a case must be avoided. Similarly, care must be taken to 
see that conversion loans and new issues made to liquidate 
maturing obligations are not included in any compilation of 
foreign investments. During the period of our study, however, 
not a single conversion loan was floated on behalf of India. 

GREAT BRITAIN'S PUBLIC INVESTMENTS IN INDIA 
For the Sterling Loans of the Government we have used 
the figures compiled by the Department of Statistics in 



Capital Investments in India A Verification 107 

India. 1 These represent the net amount of capital floated every 
year in the London Money Market on Government account. 
Besides these loans, which constitute the Public Debt of India, 





TABLE XXII 




PUBLIC INVESTMENTS 


OF BRITISH CAPITAL IN INDIA 


EVERY YEAR 


DURING 


THE PERIOD 1898-99 TO 1913-14 




(In lakhs of rupees) 






Net Amount of Other Loans 


Total Amount 




Sterling Loans Publicly 


of Loans 




Raised by the Raised 


Publicly Raised 


Year 


Government* in London^ 


in London 


1898-99 


149 375 


524 


1899-00 


18 405 


387 


1900-01 


1,393 855 


2,248 


1901-02 


131 240 


371 


1902-03 


423 360 


783 


1903-04 


612 315 


297 


1904-05 


- 23 570 


547 


1905-06 


2,035 525 


2,560 


1906-07 


1 60 75 


235 


1907-08 


i,344 300 J 


1,644 


1908-09 


673 i,374 


2,047 


1909-10 


i,37o 1,027 


2,397 


1910-11 


1,184 1,032 


2,216 


1911-12 


73 529 


602 


1912-13 


105 455 


560 


1913-14 


- 317 785 


468 



* Sterling figures converted at is. 4d. per rupee. Statistics of British 
India, vol. iii, Financial Statistics, Nominal Value. 

t Figures collected from the volumes of the Economist represent 
issue price. 

t Taken from the Report of the Controller of Currency, 1913-14, 
P- 53- 

there are others raised by the big industrial concerns and 
commercial enterprises carrying on their business in India. 
We have collected information about the capital raised abroad 
by such concerns from the issues of the Economist. For the 

1 These figures are published in the Statistics of British India, vol. iii, 
Financial Statistics. 



io8 India's Balance of Indebtedness 

year 1907-8 figures of the Economist could not be obtained, 
and hence we have used the estimate of the annual flow of 
such loans prepared by H. F. Howard. This estimate has 
been more fully dealt with elsewhere. While collecting the 
data from the volumes of the Economist we have taken account 
of the amount of loans actually issued at their issue price and 
not of the nominal value of the loans authorized. By adding 
up the two sets of figures for Government and private 
borrowings thus collected, we have arrived at the net amount 
of capital publicly floated in London, every year, on behalf 
of India. The results are presented in Table XXII. 

We see from the table that the Indian borrowings in London 
amounted to Rs. 17,292 lakhs during the period 1898-99 to 
1913-14. The years 1900-1, 1905-6, and 1907-8 to 1910-11 
were years of particularly heavy borrowings, and except in the 
year 1903-4 we had a credit balance of payment on capital 
account in all years. We shall now examine how far these 
figures are correct in the light of investigations made by some 
eminent statisticians to arrive at the magnitude of British 
investments in India. 

i. EDGAR CRAMMOND'S ESTIMATE 1 

In 1907 Edgar Crammond made an estimate of the total 
amount of British capital invested in foreign countries and 
colonies till the end of 1906. Some years afterwards the esti- 
mate was brought up to the end of 1910. In his estimate 
Crammond has given the amount of British capital absorbed 
by every individual country and colony. Besides the main 
purpose of Crammond's investigation being to prove the 
prosperity of British investments abroad, he has also given 
similar figures for the years 1896 and 1897. From this estimate 
we get the total amounts of British capital invested in India 
at the end of 1896, 1897, 1906, and 1910. 

1 Edgar Crammond, "British Investments Abroad," Quarterly 
Review, July 1907 and July 1911. 



Capital Investments in India A Verification 109 

The sources on which Crammond relies for his information 
are: The Official List of the London Stock Exchange, the 
Official Lists issued by Provincial Stock Exchanges, and the 
Stock Exchange Official Intelligence. 1 For calculating the 
amount of British capital invested in India he takes into 
consideration the value of Indian securities quoted in the 

TABLE XXIII 

E. CRAMMOND'S ESTIMATE OF BRITISH CAPITAL INVESTED IN INDIA 

AND CEYLON 

(In lakhs of rupees)* 

Year\ 1896 1897 1906 1910 

Government Stock . . . . 15,900 19,140 

Railways 14,010 19,440 

Corporation Stock, Banking, 

Financial, Land, etc. . . 750 1,200 

Mines 210 . 345 

Miscellaneous . . . . . . 3>9o 6,000 

Total 44,ioo 34,7?ot 46,125 64,500 

* Original figures are in millions of s. We have converted them 
at is. 4d. per rupee. 

f Calendar Year. 

J The figure appears to be incorrect inasmuch as it suggests that 
British capital worth Rs. 9,330 lakhs was withdrawn from India during 
the year 1897-98. Never in the history of British capital investments 
in India has such a large amount of capital been withdrawn from India 
during a single year. 

Stock Exchange Official Intelligence, which includes the 
securities quoted in the other two lists. This method cannot 
be applied to estimate the amount of capital employed by 
British companies in carrying on their business in India. The 
capital of such concerns is therefore completely excluded by 
Crammond from his estimate. The figures of British capital 
investments in India and Ceylon according to Crammond 
are given in Table XXIII. 

1 This valuable document contains particulars of all the companies, 
home and foreign, whose securities are dealt in or known on any of 
the Stock Exchanges of the United Kingdom. 



no India's Balance of Indebtedness 

II. SIR GEORGE PAISH'S ESTIMATE OF BRITISH INVESTMENTS 

IN INDIA 

In the same way as Crammond, Sir George Paish, while cal- 
culating the total amount of British capital exported, inci- 
dentally gives figures for India's indebtedness to Great Britain 
on capital account. He supplies two sets of data. From his 
first estimate which was embodied in the papers he read 
before the Royal Statistical Society we get the total amount of 
capital imported from Great Britain into this country till 
the year 1910.* In addition, we also find figures of loans 
raised for individual years during the period 1906 to 1910, 
but they relate only to loans floated on behalf of the Govern- 
ment, the Municipalities, and the Railways. His second com- 
pilation, which covers the period 1908 to 1913, is more 
comprehensive. 2 It gives the total amount of loans incurred 
on behalf of India in Great Britain for every year during the 
period. 

For the major part of his information he relies on the Reports 
of the Inland Revenue Commissioners. These reports contain 
particulars of the income derived by British investors from 
abroad which is disclosed for the purpose of taxation. The 
income so earmarked comprises the following heads :3 

Income disclosed by agents for payment of interest on foreign 
and colonial Government securities. 

Income disclosed by agents for payment of dividends and interest 
of foreign and colonial companies and corporations. 

Income disclosed by bankers and coupon-dealers in connection 
with the realization of foreign and colonial coupons. 

Income declared by persons, firms,or public companies as received 

1 Sir G. Paish, " Great Britain's Investments in Other Lands," 
Journal of the Royal Statistical Society, September 1909; "Great 
Britain's Investments in Individual Colonies and Foreign Countries/ 
ibid., January 1911. 

a The Statist, February 14, 1914. 

3 53. Inland Revenue Report, p. 128. Quoted by Crammond, 
Quarterly Review, July 1911, p. 44. 



Capital Investments in India A Verification in 

in respect of investments abroad without taxation at the hands of 
agents, bankers, or coupon- dealers. 

Profits of those railways abroad which are owned and worked 
by British companies with the seat of management in the United 
Kingdom. 

The commissioners, however, point out that besides the 
earnings coming under these earmarked heads there exists a 
large amount of income which cannot be assigned to any 
particular head in the absence of information which the tax- 
payer alone can submit. Such unidentified income they include 
under the general category of "business, professions, etc., 
not otherwise detailed." It includes the profits derived from 
the following sources: 1 

Concerns other than railways situated abroad but having their 
seat of direction and management in the United Kingdom, e.g. 
mines, gasworks, waterworks, tramways, breweries, tea, coffee, and 
rubber plantations, nitrate grounds, pil fields, land and financial 
companies, etc. 

Concerns jointly worked abroad and in the United Kingdom, 
such as electric telegraph cables and shipping. 

Foreign and colonial branches of banks, insurance companies, 
and mercantile houses in the United Kingdom. 

Mortgages of property and other loans and deposits abroad be- 
longing to banks, insurance companies, land mortgage and financial 
companies, etc., in this country. 

Profits of all kinds arising from business done abroad by manu- 
facturers, merchants, and commission agents resident in the United 
Kingdom. 

Sir G. Paish does not take account of the income from the 
last four sources but amplifies the information on the first 
source of income contained in the commissioners' reports by 
examining the reports, balance-sheets, and income statements 
of several thousand companies. 3 The profits earned by the 

1 C. K. Hobson, The Export of Capital, p. 200. 

a " In fact, I have examined the reports of all British companies work- 
ing abroad about which official information could be obtained. " Sir 
G. Paish, Journal of the Royal Statistical Society, vol. 74, part ii, p. 167. 



H2 India's Balance of Indebtedness 

latter are added to the amount of income from foreign invest- 
ments assessed to income-tax in the reports of the Revenue 
Commissioners. The total income is then capitalized on a 
yield basis of 5-2 per cent. To arrive at the amount of capital 
investments in individual countries and colonies different 
rates of capitalization are used. According to this estimate the 
total amount of British capital publicly invested in India and 
Ceylon at the end of 1910 was as follows: 

TABLE XXIV* 
BRITISH INVESTMENTS IN INDIA AND CEYLON AT THE END OF igiof 

(Rs. 1 00,000) J 
Government . . . . . . . . . . . . 26,850 

Railways . . . . . . . . . . .... 20,475 

Corporation Stocks, Banking, Financial, Land, etc. . . 1,320 
Mines . . . . . . . . . . . . . . 525 

Miscellaneous 5,610 



Total 54,78o 

* Compiled from the figures published in the Royal Statistical 
Society's Journal, vol. 74, p. 180. 
f Nominal value. 
J The original figures in s are converted at is. 4d. for a rupee. 

Sir George Paish, however, confesses that the figures cal- 
culated by him are an under-statement. Mr. Henry Beaumont 
emphasized the same point in the course of the discussion 
on Sir G. Paish's papers 1 at the Statistical Society. Paish's 
compilation of British capital invested in India and Ceylon 
for every year during the period 1908 to 1913 is presented 
in Table XXV. 

The figures in Columns II and III for the years 1908, 1909, 
and 1910 do not agree though compiled by the same authority. 

1 Journal of the Royal Statistical Society, vol. 72, Discussion, 
P- 483. 



Capital Investments in India A Verification 113 

For this no other reason can be assigned but some omission 
in the first set of figures compiled in 1910. The difference 
appears to be rather serious for the year 1910. We shall, 
however, accept the figures in Column III as more accurate, 
being the later. 

TABLE XV* 

ESTIMATE OF BRITISH CAPITAL INVESTED IN INDIA AND CEYLON 

EVERY YEAR DURING THE PERIOD 1908 to 1913 ACCORDING 

TO SIR G. PAISH 

(In lakhs of rupees)"^ 

The Amount of British Capital Invested in 
Year India and Ceylon^. 

I II III 

1908 2,020 1,965 

1909 2,383 2,295 

1910 2,208 2,700 

1911 765 

1912 555 

1913 ' 5?o 

* Compiled from the information supplied by the London Statist 
dated February 14, 1914, and the Journal of the Royal Statistical 
Society, vol. 74. 

f The original figures in s converted at is. 4d. per rupee. 

J The figures exclude conversion loans and vendors' shares and 
represent issue price. 

Journal of the Royal Statistical Society > vol. 74, p. 172. 



III. THE EXTENT OF BRITISH CAPITAL IN INDIA: 1 H. F. HOWARD 

Unlike the last two estimates H. F. Howard's estimate relates 
exclusively to India and supplies information both for the total 
amount of British investments in India at the end of 1910 and 
for individual years during the period 1899 to 1913. However, 
Howard does not give any information about the sources of 
his data bearing on the probable amount of capital imported 
by India. He starts with the Government of India loans, which 

1 H. F. Howard, India and the Gold Exchange Standard, p. 92. 

H 



H4 India's Balance of Indebtedness 

cover by far the largest portion of capital imported into the 
country and which largely represent productive expenditure 
on railways and irrigation works. These loans, which amounted 
to Rs. 31,500 lakhs at the end of 1910, he assigns entirely to 
British investors. The outstanding railway annuities, which 
amounted approximately to Rs. 10,950 lakhs, are also taken 
into account. Next to Government of India loans are the loans 
floated in the open market in London by local bodies in India. 
The total amount of these loans on March 31, 1910, was about 
Rs. 3,600 lakhs. 1 Allowing for the fact that a large portion of 
these loans is held by the natives of India, the Controller of 
Currency estimates Rs. 1,500 lakhs as the share of English 
investors. He does not give any reasons for the assignment 
of this share only. The stock of public companies is the third 
important item. At the end of 1908-9 the paid-up capital of 
the companies registered in India was Rs. 6,550 lakhs. Much 
of this was invested in mills or presses mainly for pressing 
cotton, jute, wool, and silk. 2 Allowing for the share of Indian 
investors, which was not small, Howard puts Rs. 3,000 lakhs 
as the amount of British capital under this head. Here, again, 
the division of shares between Indian and British capital seems 
to be wholly arbitrary. In the case of companies with a sterling 
capital doing their business more or less exclusively in India, 
almost the whole of it is taken to be of British origin. By the 
close of the year referred to above the capital of these com- 
panies amounted to Rs. 10,350 lakhs and the debentures to 
Rs. 6,300 lakhs, making Rs. 16,650 lakhs in all. To these 
figures Howard adds Rs. 3,900 lakhs on account of the "English 
Banking, Loan, and Insurance Capital employed in India." 
This takes into account the class of public companies registered 
outside India and doing only a small part of their business in 
this country, Bringing together all these items we get the total 

1 H. F. Howard, India and the Gold Exchange Standard, p. 93. 
a The figures exclude the capital of the Presidency Banks, which 
amounted to Rs. 360 lakhs. 



Capital Investments in India A Verification 115 

amount of British capital invested in India at the end of 1910, 
as follows: 

In Lakhs of Rs* 

Government loans 31,500 

Railway annuities 10,950 

Loans of local bodies 1,500 

Companies registered in India . . . . 3,000 

Companies with a sterling capital . . . . 16,650 

Banking, Insurance, etc 3,900 



Total Rs 67,500 

* Sterling figures converted at is. 4d. per rupee and represent 
nominal value. 



Mr. Howard's estimate of British capital imported into 
India every year from 1899-1900 to 1913-14 is based on 
more reliable data. He collects the relevant figures under four 
heads: net debt incurred at London on behalf of the India 
Government, net capital deposited by railway companies with 
the Secretary of State, capital borrowed by Port Trusts and 
other capital loaned to India. Net capital deposited by railway 
companies excludes the capital raised by the Bengal and 
North- Western Railway "in which Government have no 
direct financial concern." The last heading, "other capital 
loaned to India/' requires some explanation. Besides the 
Government of India, Railways, and Port Trusts, there were 
private firms who raised loans in the London Money Market 
by issuing public securities. Every year there was some import 
of capital into India on this account and this is put under the 
category "other capital, etc." Howard arrives at an approximate 
figure of these loans on the basis of information published by 
the Indian Commercial Intelligence Department to show the 
capital of sterling companies working exclusively in India. 
The tables relate to the period 1905-6 to 1909-10. He con- 
cludes: "Excluding the railway figures the capital loaned to 
British India increased during the period from 26 to over 



n6 Indicts Balance of Indebtedness 

4.0 millions, of which about 5! millions were invested in 
tea, 4 millions in navigation, and 3 millions in jute. This 
increase is at the rate of 3 millions a year. 1 He assumes the 
figure of the new loans made to India by the London Money 

TABLE XXVI* 

THE ANNUAL NON-GOVERNMENT EXTERNAL BORROWING BY INDIA 
ACCORDING TO H. F. HOWARD, 1899-1900 TO 1913-14 

(In lakhs of rupees)^ 

Other Capital Raised 

Port Trust by non-Government 

Year% Borrowings Concerns in India 

1899-00 300 

1900-01 300 

1901-02 300 

1902-03 300 

1903-04 300 

1904-05 300 

1905-06 300 

1906-07 300 

1907-08 300 

1908-09 300 

1909-10 150 28s 

1910-11 315 S8s 

1911-12 120 i6s 

1912-13 i6s 

I9I3-H 



* Compiled from the figures given in Appendix I, Report of the 
Controller of Currency, 1913-14. 

f Sterling figures converted at is. 4d. per rupee. 

J Indian fiscal year from the ist of April to 3ist of March. 

Figures compiled from the issues of the Economist refer to calen- 
dar years. 

Market to be 2 millions for every year during the period 
prior to 1909-10. For the rest of the period he has corrected 
this average in the light of the information supplied by the 
Economist. As we have already collected from an authoritative 

1 Report on the Operations of the Currency Department, 
P- 52- 



Capital Investments in India A Verification 117 

Government publication the information about Government 
and Railway loans, Table XXVI represents an estimate of 
India's non-Government borrowings according to Howard. 



LIMITATIONS OF THE PRECEDING ESTIMATES 

The estimates of the total amount of British capital invest- 
ments made by Edgar Crammond and Sir George Paish do 
not refer to India alone but to India and Ceylon together. 
Naturally this exaggerates the amount of British capital 
invested in India by the amount of British capital invested in 
Ceylon. 

As a partial off-set against this over-estimate we may take 
into account the fact that Crammond and Paish do not take 
into account the capital employed in India by the British 
shipping companies, telegraph, insurance, and other com- 
panies whose head offices are situated in Great Britain. 1 This 
omission is likely to introduce a large margin of error in an 
estimate of the total amount of British capital invested in 
India, because the Exchange Banks and the Shipping com- 
panies engaged in the Coastal trade of India with their head 
offices in London are supposed to employ a large amount of 
their capital in this country. 

In addition to this omission, which is common to both these 
estimates, there are some other points which tend to undermine 
the accuracy of Paish's estimate in particular. Sir George 
Paish has formed his estimate of Government loans by 

1 "It is necessary to obtain a comprehensive idea as to the amount 
of British capital employed or invested abroad to make a further 
addition in respect of the capital engaged by British shipping employed 
in the colonial and foreign carrying trades and also of the capital 
represented by the telegraph, insurance, and other companies carrying 
on business partly in the United Kingdom and partly in the colonies 
and foreign countries, which cannot, of course, be geographically 
apportioned/' E. Crammond, Quarterly Review, July 1907, p. 253. 

Vide Sir G. Paish, Journal of the Royal Statistical Society, vol. 74, 
p. 187. 



u8 India's Balance of Indebtedness 

capitalizing the income received by British holders of Indian 
Government securities as reported to the British Income Tax 
authorities, and of the loans taken by Indian Corporations 
by an examination of individual company reports. But the 
income actually received by British investors in a particular 
year may not represent all the income to which they may be 
entitled. 1 In fact, a portion of that income is never brought to 
the Home Country, but is reinvested in India. This portion, 
therefore, escapes capitalization in the year the computation 
is made. Secondly, there is a small amount of British capital 
invested in India which does not bring any income to the 
investor.* The method of capitalization adopted by Paish 
cannot take any cognizance of this amount also. True, our 
balance of payments is not affected by such investments so 
far as the payment of interest is concerned, because either 
they do not bear any interest or the interest is not transmitted 
abroad. But the balance of payments must have been affected 
by the import of this capital, in the year in which such imports 
took place. 

H. F. Howard's estimate, on the other hand, is free from all 
the criticism directed against the other two estimates. It 
refers to British capital investment in India alone and includes 
in its purview even the class of capital which does not yield 
any interest. Moreover, Howard also makes some allowance 
for the capital of the Exchange Banks, Shipping Companies, 
etc., which were registered in London and which carried on a 
good deal of business in India. But the greatest defect of his 
estimate is that it is largely a guesswork. A large amount of 
capital employed in India is assigned to Great Britain without 
any statistical evidence. Besides, the estimate is also theoreti- 

1 "As a matter of fact a large part of the income earned by .British 
capital invested abroad was never brought home but was reinvested 
in the country from which it was derived." Journal of the Royal 
Statistical Society, vol. 72, p. 482. 

a Ibid., vol. 74, p. 192. 



Capital Investments in India A Verification 119 

cally defective on one point; it includes the share of India's 
internal debt held by Europeans in India. As a matter of fact, 
the capital invested by Europeans in rupee securities is not 
imported from Great Britain and, as such, should be omitted 
from an estimate of the total amount of British capital invested 
in this country. By the term "British Investments'* we mean 
capital flowing to India from Great Britain and not the amount 
of capital invested in India by Europeans staying in India. 
For the sake of comparison we give below all the three esti- 
mates of the total amount of British capital invested in India 
at the end of 1910-11 :* 

(In lakhs of Rs.) 

E. Crammond 64,500 India and Ceylon 

Sir G. Paish 54>78o India and Ceylon 

H. F. Howard 63,000* India 

We think that Crammond's estimate is more correct than 
the other two inasmuch as it is based on actual data and 
takes account of all the classes of British investments in India 
except Banking, Insurance, and Shipping capital. To make 
the actual results more comparable, we omit from Howard's 
estimate Rs. 3,900 lakhs, the capital of the Exchange Banks 
and the Shipping companies which is not included in the other 
two estimates. Howard's figure for British investments in 
India, then, stands at Rs. 59,100 lakhs. This is certainly higher 
than the estimate of Sir George Paish, which is admittedly an 
under-estimate. On the other hand, it is lower than Cram- 
mond's estimate by Rs. 5,400 lakhs. This difference, however, 
may be due to the inclusion of British investments in 
Ceylon by Crammond. We may, therefore, say that the 

1 Calendar Year. 

* After making allowance for the inclusion in his original estimate 
of Rs. 4,500 lakhs on account of the internal rupee debt held by 
Europeans in India. 



I2O India's Balance of Indebtedness 

estimates of British investments in India prepared by 
Crammond and Howard are approximately correct as far as 
they go. 

VERIFICATION OF TABLE XXII 

At the end of the year 1896 the amount of British invest- 
ments in India according to Crammond was Rs. 44,100 lakhs. 
It went up to Rs. 64,500 lakhs by the end of the year 1910. 
This means that British capital worth about Rs. 20,400 lakhs 
was invested in India during the period 1896 to 1910. 
According to our estimate, which is presented in Table XXII, 
the amount of British capital invested in India during the 
period 1898-99 to 1913-14 was Rs. 17,292 lakhs. During the 
common period 1898-99 to 1910-11, the total amount of 
British capital invested in India, according to Crammond, 
was Rs. 18,570 lakhs, while according to our calculation the 
figure works out at Rs. 1 5, 662 lakhs. 1 The excess of Rs. 2, 908 lakhs 
which is shown by Crammond 's estimate is most probably 
due to his inclusion of British capital invested in Ceylon. 
Therefore, so far as the total amount of British capital imported 
into India during the period of our study is concerned, our 
estimate is approximately correct. To ascertain the accuracy 
of our figures representing the annual flow of this capital we 
bring together the relevant data in Table XXVII. 

The figures of loans raised on behalf of the Government, 
which are taken from the Financial Statistics of India, itself 
a Government publication, need no verification. In the case 
of non- Government loans we find that Howard's figures, which 

1 To arrive at these figures we have deducted from E. Crammond *s 
figure for the total amount of British capital invested in India during 
1896-97 to 1910-11 the amount of British capital invested in India 
during the years 1896-97 and 1897-98, which comes to about 
Rs, 1,830 lakhs, and from our estimate, which covers the period 
1898-99 to 1913-14, a similar allowance has been made for the 
amount of British capital invested in India during the years 1911-12, 
1912-13, and 1913-14, which works out at Rs. 1,630 lakhs. 



Capital Investments in India A Verification 



121 



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122 India's Balance of Indebtedness 

are the only figures available for comparison, are throughout 
lower than the figures compiled by us except for the years 
1901-2 and 1906-7. We, however, know that Howard cal- 
culated the average amount of sterling capital raised by non- 
Government concerns at Rs. 450 lakhs every year, during 
the period 1905-6 to 1909-10 and brought it down to Rs. 300 
lakhs so as to make it applicable to the period 1899-1900 to 
1913-14 as a whole. He has not assigned any reason whatso- 
ever for lowering the average to Rs. 300 lakhs for the earlier 
years. Later on he made some corrections in this general 
average for the period 1908-9 to 1913-14, but on the whole 
his figures appear to be somewhat arbitrary and unreliable. 
On the other hand, our figures for the total amount of British 
capital imported into India are largely in agreement with the 
figures of Sir George Paish which are compiled from the 
information provided by the Economist. The close approxi- 
mation between these two sets of figures bears out their correct- 
ness. Therefore, according to all the available evidence, our 
estimate of the amount of British capital publicly invested 
both for individual years as well as for the period as a whole 
is approximately correct. 

BRITISH PRIVATE INVESTMENTS IN INDIA 

Besides public investments in India, made through the issue 
of securities for public sale, there are other investments on 
private account. They take a great number of forms and 
receive very little publicity. If such investments are made by 
the private sale of securities they may be divided into two 
classes: first, sales by issuing Governments or Corporations, 
of entire issues or large blocks of new issues at the time 
of issue, direct to investment companies or to syndicates of 
private investors; and second, the transfer of small lots of 
Indian securities from Indian to British ownership in the 
ordinary course of stock-exchange transactions. But the private 



Capital Investments in India A Verification 123 

purchase of Indian securities is only one of the methods by 
which private capital is invested in India, and as we have 
said before, private investments in India assume many other 
forms. These include: the investments of British insurance 
companies in India; British purchases of Indian mining, 
agricultural, and urban interests; the investments of British 
shipping companies in Indian coastwise shipping; direct 
investments in Indian industrial plants and mercantile estab- 
lishments, and British capital used in financing Indian import 
and export trade. 

It is impossible, however, to get any information bearing 
directly on the volume of such investments in India. Hence 
resort must necessarily be taken to indirect methods which 
might yield some rough estimate. Edgar Crammond has 
estimated the total amount of British investments abroad, 
both public and private separately, at the end of the years 
1897, 1906, and 1910. The percentages of the total amount of 
private investments to the total of public investments at the 
end of these years were 27, 20, and 14 respectively. 1 According 
to Sir George Paish this percentage relation between the 
totals of British public and private investments was reduced 
by 1-5 during 1910 to 1913,* and though his absolute figures 
are an under-estimate they may be taken as a fairly accurate 
index of a trend. So it means that at the end of 1913 the 
percentage was 12-5. The decrease of private investments 
relatively to public investments is due not only to the increase 

1 (In lakhs of rupees) 

Total Amount of Total Amount of Percentage 

Great Britain's Great Britain's of 

Year Public Investments Private Investments II to I 

I II 

1897 2,82,900 77,ioo 27 

1906 3>93,ooo 79,500 20 

1910 4,90,800 67,500 14 

a The figures of Sir G. Paish show that the percentage relation 
between Public and Private Investments was 9 at the end of 1910 
and 7*5 at the end of 1913. 



124 India's Balance of Indebtedness 

of Great Britain's public investments abroad during the 
period, but also to the absolute decrease in the total amount 
of private investments themselves. "The tendency lately with 
regard to enterprises abroad had been to turn them into 
companies.'' 1 New investments of private capital directly by 
the investor or through mercantile and banking houses were 
diminishing year by year, while the old investments were being 
gradually transformed into public investments by the con- 
version of private securities into public securities and private 
enterprises into companies. The net result of this process of 
transformation can be discerned in the very slight increase of 
Rs. 2,400 lakhs, i.e. 3 per cent in the total amount of British 
private investments during the period 1897 to 1906 and in the 
decrease of Rs. 12,000 lakhs, i.e. 15 per cent during 1906 to 
1910. The figures of Sir G. Paish show that this tendency of 
private investments to decrease continued till the end of 1913. 
The slight increase in the total amount of British private 
investments abroad during 1897 to 1906 may very likely be 
due to the impetus they received from the heavy outburst of 
public investments since 1904. But the impetus seems to have 
lasted only for a short time. 

On the supposition that the percentage relation between 
the total amount of Great Britain's public and private invest- 
ments abroad is true also in the case of India taken separately, 
we have calculated the total amount of British private invest- 
ments in India at the end of 1897, 1906, 1910, and 1913. For 
the remaining years covered by the period of our study our 
calculations are based on the assumption of equal annual 
distribution of the difference in these percentages. The results 
are represented in Table XXVIII. 

According to this estimate, during the period 1898-99 to 
1913-14, private capital worth Rs. 2,293 lakhs was with- 
drawn from India or converted into public securities. The 

1 Sir R. B. Martin, "Discussion on Sir G. Paish's paper, Journal 
of the Royal Statistical Society, vol. 72, p. 486, 



Capital Investments in India A Verification 125 





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126 India's Balance of Indebtedness 

years 1900-1 and 1905-6 were the only years during which 
there was a net excess of new private investments over with- 
drawals. As shown before, the total amount of British capital 
privately invested abroad showed an increase of Rs. 2,400 lakhs 
during the years 1897 to 1906. In the case of India there was a 
net reduction of Rs. 698 lakhs in that amount during the same 
period. This discrepancy, however, can be explained. The 
net increase of British private investments during 1897 to 
1906 was due to the boom atmosphere generated by the era 
of large public investments which dawned in the year 1904. 
The period of heavy investments in India began in the year 
1905-6, a year after "the recovery of British foreign invest- 
ments." During this year there was a net excess of new private 
investments in India, but the excess was not big enough to 
counterbalance the total amount of net withdrawals which 
were effected during 1897 to 1904-5 due to political disturb- 
ances in India. Thus this net increase of British private 
investments was not transmitted to India, first because large 
public investments of British capital in India began a year 
later than they began in other countries, and, secondly, because 
the political disturbances in India during 1905-6 deterred the 
British investor from incurring fresh risks of private invest- 
ments. The political unrest in India was also an important 
factor 1 which accentuated the general tendency of private 
investments to transform themselves into public investments 
or to be withdrawn from the country, especially from the year 
1905-6 onwards. 

Whether British private investments in India were com- 
pletely withdrawn or returned to India as public investments, 
we consider the net amount of withdrawals every year as a 
debit item in India's International Balance of Accounts. If a 
part or the whole of the withdrawn capital was reinvested in 
India in public securities, it has already been accounted for 

1 C. K. Hobson, The Export of Capital, p. 158; E. Crammond, 
"British Investments Abroad," Quarterly Review, July 1907, p. 255. 



Capital Investments in India A Verification 127 

as a credit item. We are counting it twice, once as a debit and 
once as a credit, because we do not know the actual amount of 
such capital. 

The estimate of the total amount of foreign capital invested 
in India from 1898 to 1913 reached in this chapter is given in 



TABLE XXIX 

DIRECT AND INDIRECT ESTIMATES OF GREAT BRITAIN'S CAPITAL 

INVESTMENTS IN INDIA 

(In lakhs of rupees) 


DIRECT ESTIMATE 


Great Britain's 


Great Britain's 


^ 






Public 


Private 






Investments 


Investments 




Indirect 


Year 


in India* 


in India\ 


Total 


Estimate^. 


1898-99 


524 


124 


400 


409 


1899-00 


387 


~ H4 


243 


1,225 


1900-01 


2,248 


" + 308 


2,556 


1,308 


1901-02 


371 


175 


196 


i>337 


1902-03 


783 


- 85 ' 


698 


577 


1903-04 


297 


-338 


~ 635 


179 


1904-05 


547 


151 


396 


1,190 


1905-06 


2,560 


+ 257 


2,817 


2,497 


1906-07 


235 


246 


ii 


1,029 


1907-08 


1,644 


271 


1,373 


2,668 


1908-09 


2,047 


252 


i,795 


1,428 


1909-10 


2,397 


259 


2,138 


2,465 


1910-11 


2,216 


357 


1,859 


728 


1911-12 


602 


151 


451 


565 


1912-13 


560 


164 


396 


535 


1913-14 


468 


180 


288 


1,831 


* Supra, 


Table XXII. 


t 


Supra, Table 


XXVIIL 


J Supra, 


Table XXL 









Table XXIX along with the corresponding indirect estimate 
reached in Chapter VI. 

The indirect estimate of the total amount of foreign capital 
imported into India during the period of our study is greater 
by Rs. 5,011 lakhs than the corresponding figure disclosed by 
direct evidence. If the values of the various invisible items 



128 Indicts Balance of Indebtedness 

in our international transactions, calculated in the preceding 
chapters and the direct estimate of the total amount of foreign 
capital investments in India during 1898-1913 reached in 
this chapter are both approximately correct, these estimates 
should fairly agree with each other. The difference of Rs. 50 
crores, which is not small, is therefore an indication of the 
fact that either the direct estimate or the data of the indirect 
estimate are defective. As the direct estimate of the British 
public investments in India is based upon fairly complete 
data, the discrepancy between the two estimates must be due 
largely to the calculations of the British private investments 
in India and the data of the indirect estimate. It is more likely 
that it can be located in the latter, which involves a large 
number of estimates. 

In calculating the amount of interest charges paid by India 
we have already stated that the application of Lehfeldt's 
average rates of interest yielded by fixed-income colonial 
stocks to the Government borrowings after 1898 might 
exaggerate the volume of India's debits. This for the reason 
that the average rates of interest on fixed-income colonial 
stock are higher than the rates of interest at which Indian 
Government loans were being floated in London. 1 If the 

1 Rate of Interest Lehfeldt's Average Rate 

on India of Interest on Colonial 

Government Loans* Fixed Income Stock 

Year (per cent) (per cent) 

1901 3-0 3-40 

1902 3-0 3-21 

1903 3-0 3-21 

1904 3-0 3-78 

1905 3-0 3-78 

1906 3-0 3-85 

190? 3'5 3*99 

1908 3-5 4-04 

1909 3-5 3-96 

1910 3-5 4-19 

1912 3'S 4'30 

1913 4'0 4-44 
* D. L. Dubey, Indian Publk Debt, p. 31. 



Capital Investments in India A Verification 129 

error that has crept into our calculation of interest payments 
by India due to this factor can be approximately determined 
and the necessary allowance made in the final balance of 
indebtedness, it will lessen the discrepancy between the 
direct and the indirect estimate of foreign capital invested in 
India. The Financial Statistics of British India give us all the 
details about the foreign borrowings of India on Government 
account and the interest payments thereon. By subtracting the 
figures of foreign borrowings on Government account from 
the indirect estimate of foreign capital investments in India 
reached in the last chapter, we shall get the annual amount of 
India's foreign borrowings on non-Government account. To 
the amount of interest charges paid by the Government every 
year, published in the Financial Statistics, we shall add the 
amount of interest charges payable on non-Government 
borrowings. To ascertain these interest charges the rate of 
interest charged on the totaU amount of such borrowings 
previous to 1898 will be assumed to be 3 per cent as before, 
and Lehfeldt's average rates of interest will be applied to the 
borrowings after 1898. The difference between the amount 
of annual interest payments arrived at by this process and that 
calculated in Chapter VI will represent the approximate error 
caused by the application of Lehfeldt's average rates of interest 
to India's foreign borrowings on Government account. Cal- 
culations made on the basis of this reasoning disclose an 
excess of about Rs. 300 lakhs in the figure of interest payments 
by India. 

Then, again, in calculating the values of imports and exports 
we have not taken into account the sea-borne trade of non- 
British India. In a complete balance sheet of India's inter- 
national payment, however, credit and debits arising out of 
that trade will have to be taken into account. Generally this 
sea-borne trade of non-British India reveals an excess of 
exports of about Rs. 130 lakhs every year. 1 This omission in 

1 See footnote on next page. 
I 



130 India's Balance of Indebtedness 

the primary data, therefore, explains an excess of Rs. 20 crores 
in the indirect estimate of foreign capital invested in India. 
As regards the extent of unliquidated liabilities the report of 
the Controller of Currency for 1913-14 bears ample evidence. 
Debits to the extent of Rs. 800 lakhs on account of heavy 
cotton imports at the close of that year remained to be un- 
liquidated. The still unexplained difference of Rs. 19 crores 
between the two estimates may be due to the omission of trans- 
frontier trade and to errors arising out of the calculation of 
other invisible items. On the whole, considering the incomplete 
character of the data available for a direct estimate of the 
amount of foreign investments in India, the complicated 
character of the indirect estimate made in the preceding 
chapter and the necessary resort in both the cases to a large 
amount of guesswork, the agreement between the two esti- 
mates after these necessary corrections appears to be fairly 
close. 

For individual years the two sets of estimates disclose much 
less agreement. The differences are especially great for the years 
1899,1900, 1901, 1906, 1907, 1910, and 1913. Theexcess of thein- 
direct estimate of foreign capital imported into India in 1913-14 
over the direct estimate may be due to the following causes. 
First, a large amount of credits due to India on account of the 
export of opium to China in previous years was probably 
received in 1913-14. Secondly, much larger sums than usual 
were due by India at the close of this year on account of the 
heavy imports of cotton goods the settlement of which was 

NOTE TO PAGE 129. In the year 1909-10 the figures were as 
follows : 

Imports 
Rs. 1,000 
French Settlements . . . . .. 2,055 

Portuguese Settlements . . . . 390 

Travancore . . . . . . . . 1,140 

Kathiawar .. .. .. .. 1,740 

5,335 18,420 




Capital Investments in India A Verification 131 

postponed to the next year. There are also grounds for be- 
lieving that the bank crisis which occurred during the year 
led to the Exchange banks strengthening their balances in 
India. 1 The rest of the discrepancies, as explained by J. Viner* 
in the case of Canada, may largely be due to the fact that the 
data used for both the estimates were much more compre- 
hensive for the whole period of our study than for individual 
years, and the apportionment of the values of different items 
to individual years was based on conjectural hypotheses. But 
,even if the data used were complete and accurate some dis- 
crepancy between the two sets of estimates for individual 
years might still be expected. A loan recorded in this chapter 
as made in a particular year may not have influenced the data 
used for the interest estimate in the same year. A .public 
issue made in one year may represent the funding of an India 
Bill issue or a bank loan made some time previously, or the 
transformation of a private investment already made into a 
public investment. Imports may be financed by foreign 
borrowings either after or before the importation actually 
takes place. Other factors similar in character may cause large 
discrepancies between the direct and indirect estimates of 
foreign capital invested in India. However, the discrepancies 
between the two estimates for individual years due to such 
causes should offset each other in a series of years. The close- 
ness of the two estimates for the whole period of our study 
corroborates the hypothesis that the margins between the 
estimates for individual years are largely the result of the 
difference in time between the flotation of a loan and its 
effect on the commodity balance of trade of the borrowing 
country. 

1 Report of the Controller of Currency, 1913-14, p. 53. 

a J. Viner, Canada's Balance of Indebtedness, 1900-13, p. 140. 



PART II 
MECHANISM OF ADJUSTMENT 



INTRODUCTORY 

IN the preceding part of this study we have ascertained the 
extent of India's deferred payments, i.e. her balance of inter- 
national indebtedness during the period 1898 to 1913. These 
deferred payments are equivalent to her foreign borrowings. 
The pages that follow deal with the process by which India's 
balance of indebtedness adjusted itself to her foreign borrow- 
ings and brought about an equilibrium in the balance of 
immediate payments. As the foreign borrowings of the 
Government are spent almost entirely on the purchase of 
capital goods in England this problem of adjustment reduces 
itself practically to the adjustment of the private balance of 
indebtedness to India's non- Government borrowings. 1 Here, 
however, it is necessary to point out that the inflow of foreign 
capital was not the only factor not even the main disturbing 
the even balance between Indian credits and debits which 
existed in the years immediately preceding our period. The 
increasing volume and value of our commodity exports was 
another factor, more important than foreign borrowings, 
as we shall see later on, which upset that even balance. 
Hence, in trying to establish a causal relation between 
India's foreign borrowings and the substantive course of 
her foreign trade we should, where possible, make due 
allowance for other influences, including the unusually 
large demand for our export commodities, in the first 
decade and a half of the twentieth century. These other 
influences at times over-shadowed the effect of foreign 
borrowings. 

If one and the same metal gold or silver is the circulating 
medium of the trading countries and moves freely between 
them, the mechanism of adjustment of the balance of inter- 

1 Report on the Operations of the Currency Department, 1913-14, 
p. 49. 



136 India's Balance of Indebtedness 

national indebtedness of a country to its foreign borrowings 
will be, according to Mill, as follows: 

Commerce being supposed to be in a state of equilibrium when 
the obligatory remittances begin, the first remittance is necessarily 
made in money. This lowers prices in the remitting country, and 
raises them in the receiving. The natural effect is that more com- 
modities are exported than before, and fewer imported, and that, 
on the score of commerce alone, a balance of money will be con- 
stantly due from the receiving to the paying country. When the 
debt thus annually due to the tributary country becomes equal to 
the annual tribute or other regular payment due from it, no further 
transmission of money takes place ; the equilibrium of exports and 
imports will no longer exist but that of payments will ; the exchange 
will be at par, the two debts will be set off against one another, 
and the tribute or remittance will be virtually paid in goods. 

This explanation assumes, first, that the period of borrowings 
is immediately preceded by a period of even balance between 
the credits and debits of the borrowing country and, secondly, 
that the borrowings continue at an even and steady rate for a 
fairly long period. 

Mill also states that the flow of the circulating medium, 
gold, from the lending country to the borrowing is preceded 
by the price of bills on the borrowing country, reaching the 
gold-export point in the lending country and remaining at it 
so long as the flow continues. Thus, when the circulating 
medium is the same in two or more trading countries and 
moves freely between them the mechanism of adjustment, 
according to Mill, consists of five successive stages in the 
following order: 2 

(i) A rise in the price of bills on the borrowing country to the 
gold-export point. 

(ii) A flow of gold from the lending country to the borrowing 

1 J. S. Mill, Principles of Political Economy, Book iii, p. 627. 
* J. Viner, Canada's Balance of International Indebtedness, igoo-l J, 
p. 146. 



Introductory 137 

country accompanied by foreign exchange at the gold-export and 
import points in the respective countries. 

(iii) Adjustment of the price-levels between the two countries 
to the changes in the stock of monetary gold. Prices rising in the 
borrowing country and falling in the lending country. 

(iv) Changes in imports and exports, the borrowing country 
acquiring an unfavourable balance of trade and the lending country 
acquiring a favourable balance of trade. 

(v) After the unfavourable balance of trade of the borrowing 
country has become exactly equal to the rate of her foreign bor- 
rowings, the return of foreign exchange to parity, the cessation of 
specie flows and the stabilization of relative prices in the two 
countries at their new levels. 

It is obvious, however, that the mechanism of the flow of 
specie, of prices, and wages rising or falling because of gold 
movement, of readjustment through a new level of prices and 
money incomes in each of the countries do not operate in the 
same way where the monetary systems rest on a different basis. 
If there is gold standard in one country and inconvertible 
paper in the other or gold in one and silver in the other, the 
mechanism of adjustment is somewhat different. However, it 
is a generally accepted theory that the ultimate phenomena of 
trade between two countries cannot be fundamentally different 
because of differences in their monetary systems. 1 Just as trade 
between individuals will be carried on in much the same fashion 
under barter as under money regime and on the same terms 
under one monetary system or another, so will be the trade 
between nations. But in precisely what manner are these 
results, ultimately similar as we expect them to be, brought 
about when the monetary systems are dissimilar ? India during 
1898 to 1913, the period of our study, had a gold-exchange 
standard. The even balance between her credits and debits 
was disturbed during this period, partly by her heavy borrow- 
ings in Great Britain, a country on the gold standard. The 
particular problem for us to investigate is the process by 

1 F. W. Taussig, International Trade, p. 337. 



138 India's Balance of Indebtedness 

which the effects of this disturbing factor were absorbed by 
our balance of trade, and to what extent this process resembles 
the mechanism operating between two countries both on the 
gold standard. To this end we shall first consider in brief the 
essentials of the gold-exchange standard. 

THE GOLD-EXCHANGE STANDARD 

11 Gold-exchange standard may be said to exist when gold 
does not circulate in a country to an appreciable extent, when 
the local currency is not necessarily redeemable in gold, but 
when the Government or Central Bank makes arrangements 
for the provision of foreign remittances in gold at a fixed 
maximum rate in terms of the local currency, the reserve 
necessary to provide these remittances being kept to a con- 
siderable extent abroad." 1 It seeks to maintain a fixed rate of 
exchange and to conduct international trade without the actual 
use of gold as currency, and with as little flow of gold from 
country to country as possible to settle their international 
balances of payment. (Though the local currency of a country 
adopting the gold-exchange standard is not necessarily con- 
vertible into gold, international trade is carried on as if it 
were so.) 

The establishment of the gold-exchange standard in India 
was an accident. 2 The Fowler Committee, which reported in 
1898, recommended a gold standard and a gold currency 
as the ideal to be realized by the Indian currency system in 
course of time. But by a turn of circumstances this ideal fell 
into the background, and the various changes that were intro- 

1 J. M. Keynes, Indian Currency and Finance, p. 30. 

a Report of the Royal Commission on Indian Finance and Currency, 
I 9 I 4> paragraph 45 : "The system actually in operation has accord- 
ingly never been deliberately adopted as a consistent whole, nor do 
the authorities themselves appear always to have had a clear idea of 
the final object to be attained. To a great extent this system is the 
result of a series of experiments." 



Introductory 139 

duced into the Indian monetary system from time to time as 
measures to solve individual practical difficulties gave it the 
substance as well as the form of the gold-exchange standard 
system. The inauguration of the system as well as the forma- 
tion of its "central mechanism/* the Gold Standard Reserve, 
dates from Sir Edward Law's minute of June 28, 1900. However, 
for all practical purposes, and for the sake of this study, the 
system can be said to have existed in India from 1898, the 
year in which the Fowler Committee reported. The main 
features of the gold-exchange standard system as it existed in 
India during the pre-war period may now be summarized as 
follows: 

(i) The rupee, a silver token coin, was unlimited legal tender 
and was not convertible by law. 

(ii) The British sovereign was unlimited legal tender at i to 
Rs. 15 and was convertible at that rate, i.e. the Government was 
bound to give Rs. 15 in exchange for 1. 

(iii) The Government, as a matter of administrative practice, were 
willing to give sovereigns for rupees, but that entirely depended 
on their discretion, and large quantities of gold could not be 
obtained by tendering rupees. 

(iv) Similarly, as a matter of administrative practice the Govern- 
ment were willing to sell sterling bills on London in return for 
rupees at a rate not more unfavourable than is. 3!^. per 
rupee. For this a gold reserve was formed and kept in London. 

(v) To prevent the flow of gold to India the Secretary of State 
for India had put a standing notification that he would sell Council 
Bills on India at is. 4^d. the gold -import point of India. 

To explain the mechanism of adjustment of India's balance 
of indebtedness to her foreign borrowings under the gold- 
exchange standard we now take up for examination the opera- 
tion of exchange variations, gold movements, changes in 
relative price-levels, and changes in the commodity balance of 
trade in the order given. The influences of these factors will 
be considered mainly from the Indian point of view. 



CHAPTER VI 

FOREIGN EXCHANGE AND GOLD MOVEMENTS 

(l) FOREIGN EXCHANGE 

VARIATIONS in the rate of foreign exchange through their 
influence on the profitability or otherwise of commodity 
imports and exports and on the transfer of securities and bank 
deposits from country to country bring about an adjustment 
of international balances. If the supply of bills on foreign 
countries is larger than the demand for them, they fall in price 
and the currencies of the foreign countries depreciate in 
terms of the currency of the country in question. Consequently, 
foreign goods become cheaper by the amount of depreciation 
of their currency units. Imports of foreign goods increase. On 
the other hand, if the supply of bills is less than the demand 
for them, they rise in price and the currencies of the foreign 
countries go to a premium. This makes foreign goods dearer 
by the amounts of the premia and their exports are checked. 
When India begins to borrow in London, the supply of bills 
on London outstrips the demand, and the sterling exchange 
becomes favourable to her. The favourable exchange gives a 
bounty to importers and imports are stimulated, while the 
same favourable exchange becomes a tax on exporters and 
exports from India are checked. In this fashion at least a 
small portion of the borrowed funds comes to be transferred 
to India in the form of commodities. However, to understand 
the exact significance of the part played by the variations in 
the exchange rate in the mechanism of adjustment we must 
distinguish between casual and permanent disturbances to the 
even balance of credits and debits. 

In the absence of speculative purchases and sales of foreign 
exchange, the exchange rate would always stand at one of three 



Foreign Exchange and Gold Movements 141 

positions. If there is an even balance between the immediate 
receipts and payments of a country, the exchange will be at 
par; if the balance is against the country the exchange will be 
at the gold-export point, and if the balance is favourable, the 
exchange will be at the gold-import point. But, in fact, the 
exchange is always fluctuating between the gold-points and is 
rarely at par. The variations between the gold-points are due 
to the calculations and trading of the bankers and brokers who 
deal in foreign exchange. They sell forward at less than the 
gold-export point when the balance of payments is turning 
against the country and when they believe that the current of 
payments will turn round in due time. They buy exchange in 
advance at more than the gold-import point if they believe it 
can be done with profit in anticipation of a subsequent move- 
ment in the opposite direction. The general effect of these 
operations is that they prevent the exchange rate from reaching 
the gold- points and thereby prevent gold movements between 
the trading countries. However, the exchange rate can be 
prevented from reaching the gold-points only when the 
fluctuations in the international balance of indebtedness about 
the even balance of credits and debits are temporary. So long 
as the basic conditions tend to bring about an even balance of 
payments, casual disturbances in one direction are likely to 
be offset after a time by disturbances in the reverse direction. 
In fact, the operations of Exchange dealers and speculators are 
based on this assumption. It can, therefore, be conceded that 
so long as the disturbances to the even balance of credits and 
debits of a country are casual and tend to be offset by dis- 
turbances in the opposite direction within a short time, varia- 
tions in exchange rate between gold-points are an important 
factor in the adjustment of the balance of indebtedness. 
Even then they bring about the adjustment not so much 
by their effect on the imports and exports of commodities 
as through their influence on the transfer of securities 
and bank balances, on the settlement or postponement 



142 India's Balance of Indebtedness 

of maturing obligations, and on international short-term 
loans. 

Apart from casual disturbances, the even balance between 
the credits and debits of a country is likely to be upset by 
other factors, more or less permanent. A growing demand for 
a country's exportable commodities or continued foreign 
borrowings are instances of such factors. The adjustment of 
the balance of international indebtedness to foreign borrowings 
consists not in the re-establishment of the equilibrium between 
all credits and all debits immediate as well as deferred, but in 
the establishment of an even balance between immediate 
payments through the creation of an excess of trade debits 
over trade credits equal to the amount of current foreign 
borrowings so that the borrowed capital enters the country in 
the form of commodities and not of gold. If foreign capital 
continues to be imported for a fairly long period at a steady 
rate, the change in the exchange rate alone will not be able 
to bring about these adjustments without being indefinitely 
favourable to the borrowing country. But the exchange rates 
cannot continue to be favourable to any country having a 
gold standard, or even for the matter of that a gold-exchange 
standard, without reaching the gold-import point and giving 
rise to an inflow of gold or its equivalents. 

The exchange rates show an aversion to reaching the gold- 
points only when the disturbances to the even balance of pay- 
ments are temporary and when there is the probability that 
the turn of the exchanges in one direction will soon be followed 
by a turn in the other direction. They are prevented from 
reaching the gold-points in consequence of minor disturbances 
to the balance of payments by means of financial operations 
such as postponement or settlement of maturing obligations, 
transfer of securities and bank deposits, investments in short- 
term loans which either create payments in one direction or 
diminish the volume of payments in the other direction. Such 
operations are, however, necessarily limited in their volume 



Foreign Exchange and Gold Movements 143 

and are undertaken as temporary measures to be reversed in 
their direction, when the balance of payments moves to the 
other side of the equilibrium. If the balance of immediate 
payments, even for a short time, is such that the supply of 
or demand for foreign bills is greatly in excess of the demand 
or supply, the additional demand or supply created by the 
financial operations in the speculative market will not be 
sufficient to keep the exchange within gold-points. Much 
more so if the supply of foreign bills continues to be greatly 
in excess of the demand for a pretty long period, as generally 
happens in the case of continued foreign borrowings. Financial 
operations which are attractive to the speculators so long as 
disturbances are temporary cease to be so when the disturbing 
factor is more or less permanent. 

Gold movements play their part in the mechanism of adjust- 
ment through their effect on the prices of commodities enter- 
ing into international trade. Therefore, though a favourable 
exchange rate may be expected to co-operate with the effect 
of gold movements on prices at the beginning of foreign 
borrowings to stimulate commodity imports and check exports, 
variations in the exchanges exhaust their direct influence, 
when a fall in the foreign exchange is first a preliminary to 
the import of gold and then accompanies the import of gold. 1 
When prices in the lending and the borrowing country 

f Professor J. H. Hollander contends that the adjustment of the 
balance of indebtedness to foreign borrowings is effected without 
gold movements, through the influence of exchange variations within 
the gold-points on the commodity balance of trade. "International 
Trade Under Depreciated Paper : A Criticism." 32. Quarterly Journal 
of Economics, p. 678. 

Professor Taussig in a rejoinder to Hollander shows that he is 
over-estimating the influence of the variations in the exchange rate 
in affecting the substantive course of trade. Ibid., p. 692. 

J. Viner goes further and gives a satisfactory demonstration by 
his study of Canadian conditions during 1900 to 1913 that "exchange 
rates cannot operate at all, except at the beginning of the period of 
borrowings." Canada's Balance of International Indebtedness, 
P- 151- 



144 India's Balance of Indebtedness 

stabilize at the new levels, the balance of immediate payments 
becomes even, gold imports cease, and exchange returns to 
parity. 

RUPEE-STERLING EXCHANGE AND THE GOLD-POINTS 

India's foreign trade is financed by Exchange Banks which 
have their head offices in London. The Indian branches of 
these banks discount the bills drawn by the Indian exporters 
and send them for collection to their head offices in London. 
The Indian exporters receive their payments in rupees while 
the Exchange Banks in London collect the bills in sterling. 
To reimburse themselves with rupee funds in India again to 
finance the export trade the Exchange Banks purchase as 
many private bills on India as can be obtained. But generally 
the supply of bills on India, thanks to her favourable com- 
modity balance of trade, is less than the demand for them. 
Under the circumstances the rupee sterling exchange should 
rise to the gold-import point and the favourable balance of 
trade be settled by gold imports. But this process could not 
operate during the period of our study because of the inter- 
vention of an extraneous influence. The Secretary of State for 
India who had annually to make payments in sterling for 
"Home Charges," etc., taking advantage of the normal favour- 
able balance of trade, offered to sell bills on India. The 
"Council Bills/' as these bills were called, found ready pur- 
chasers in the Exchange Banks and were cashed at Bombay, 
Calcutta, or Madras from the Government Treasuries, where 
the Home Charges which were chargeable to the Indian 
revenue were collected in rupees. Since 1904 the Secretary 
of State had been selling the Council Bills, not only to defray 
the Home Charges, but also to meet the demands of the 
Exchange Banks for remittances to India on trade account. 
By the sale of Council Bills the Government of India saved 
the expenses of remitting rupees to London to purchase gold 
for the liquidation of her sterling obligations, while the 



foreign Exchange and Gold Movements 145 

Secretary of State gained an extra commission for dealing in 
rupee exchange. Thus, as the Secretary of State for India was 
one of the largest dealers in rupee exchange, the price at which 
Council Bills were bought and sold can well be considered an 
index of the rupee-sterling exchange. 

The Fowler Committee fixed the value of the rupee at is. 4d. 
by making the sovereign a legal tender coin exchangeable for 
15 rupees. The maintenance of this ratio was the main object 
of the Government's currency policy during the pre-war 
period of the gold-exchange standard. The range of variations 
in the rupee-sterling exchange or the gold-points were there- 
fore determined by the cost of remitting sovereigns from 
London to Calcutta or from Calcutta to London. This cost of 
remitting gold from London to India generally did not exceed 
|d. per rupee. The upper limit to which the rupee-sterling 
exchange could fluctuate was therefore is. 4jd., while the 
lower limit was is. 3fd. Theses, however, are the extreme 
limits between which the rupee-sterling exchange could 
fluctuate. Actually the cost of importing gold into India 
depended on complex causes varying considerably from time 
to time and might have been less than d. per rupee with 
consequent reduction in the gold-import point. 1 

The cost of remitting gold from London to Calcutta consists 
of freight, insurance charges, and loss of interest during 
transit. Variations in freight and insurance charges are com- 
paratively unimportant. "The main part of variation in the 
gold- point arises either out of the possibility of getting sovereigns 
from other sources than England or from variations in the 
rate of interest. " 2 These other sources during 1898-99 to 
1913-14 were the sovereigns in transit from Australia or the 

1 The Government had practically pledged their word to do all 
in their power to prevent the depreciation of the gold value of the 
rupee below is. sff d. Vide H. Stanley Jevons, Money, Banking and 
Exchange in India, 1922. 

> J. M. Keynes, Indian Currency and Finance, p. 115. 

K 



146 Indicts Balance of Indebtedness 

sovereigns ready to be exported from Egypt. Whenever the 
Australian exchange was such that it paid to export sovereigns 
from Australia to London, it was always profitable for the 
banks which exported them to get cash in London for their 
delivery in India. For while the freight and insurance charges 
on the shipment of sovereigns to London and to India, which 
lies on the shipping route between Australia and London, 
were the same, the bank could get its money a fortnight earlier 
by delivering the sovereigns in India rather than carrying 
them straight to London. This meant a gain of a fortnight's 
interest on the money. It was, therefore, willing to accept 
about is. 3 |d. in London for is. 4d. delivered in India 
^2 being the interest on is. 4d. for a fortnight at 5 per cent 
per annum. The gold purchased in this fashion became 
equivalent to a telegraphic transfer on India, i.e. it was worth 
^d. more than the Councils. Hence, whenever the price of 
Council Bills was more than is. 3y|d. per rupee, sovereigns 
in transit from Australia were preferred as a means of remit- 
tance to India. 

The gold exports from Egypt were not so serious a com- 
petitor to Council Bills as the Australian sovereigns. As the 
cost of sending gold to India from Egypt, which lies between 
India and London, is the same as the cost of sending gold to 
London, an Egyptian bank remitting gold could accept any- 
thing more than is. 4d. in London for the delivery in India 
of a rupee worth of gold. Hence, whenever the Alexandrian 
exchange on London was below par and the Council Bills 
were at about is. 4-^d. per rupee, Egyptian gold could under- 
cut the Councils as a means of remittance to India. However, 
the amount of remittances available from this source was very 
limited because the weak Alexandrian exchange which stimu- 
lated the flow of gold out of Egypt gathered strength when 
some gold was exported and thus modified the conditions 
governing the gold flow. Nevertheless, when at the end of the 
season the Egyptian banks found themselves in possession of 



Foreign Exchange and Gold Movements 147 

more gold than they needed, the Councils had to be sold at a 
relatively low price to prevent the flow of that gold to India. 

Besides the availability of gold from Australia and Egypt 
for exportation to India the variations in the Indian bank- 
rate also led to variations in the gold-import point. As said 
before, the loss caused to the exporters of gold from London is 
^ 2 d. per rupee when the Indian bank-rate is at 5 per cent. 
If this bank-rate rises the loss will be more ; if it falls the loss 
will be less with consequent changes in the gold-import point. 

These considerations lead us to the conclusion that the gold- 
import point of India during the pre-war period of the gold- 
exchange standard was subject to variations from extraneous 
causes like a fall in the Australian or Alexandrian exchange. 
To the extent the variations in the rupee-sterling exchange 
about par were due to these causes, they were not deter- 
mined by India's balance of immediate payments. To carry 
out his policy, which was to prevent export of more gold to 
India than was actually required for absorption by the public, 1 
the Secretary of State had to offer Council Bills at a price at 
which the Australian or the Egyptian gold might have been 
delivered in India. But it is not always easy to know at exactly 
what price Australian or Egyptian gold will undercut Council 
Bills as a means of remittance, and hence "not infrequently" they 
were " unintentionally sold at a price which made it cheaper 
to send gold." If we leave out of consideration these extraneous 
factors which were never very serious, the gold-import point 
of India during the pre-war period of the gold-exchange 
standard could be regarded as being is. 4^d. (is. 4'i25d.) 
and the gold-export point at is. 3fd. (is. 39o6d.), below 
which the Secretary of State did not offer any bills. 

To understand the part played by variations in the exchange 

rate in bringing about an adjustment between India's balance 

of indebtedness and her foreign borrowings we give in 

Table XXX the average rate of exchange, the commodity 

1 G. F. Shirras, Indian Finance and Banking, p. 304. 



148 India's Balance of Indebtedness 

balance of trade, and the foreign borrowings for every year 
during 1898 to 1913. 
Throughout the greater part of the period of our study 

TABLE XXX 

THE AVERAGE RATE OF EXCHANGE, THE COMMODITY BALANCE OF 
TRADE, AND FOREIGN BORROWINGS 



Year 
1898-99 
1899-00 
1900-01 
1901-02 
1902-03 
1903-04 
1904-05 
1905-06 
1906-07 
1907-08 
1908-09 
1909-10 
1910-11 
1911-12 
1912-13 



Average 
Rate of 
Exchange 
s. d. 
3-972 
4*069 

3'973 
3-988 
4*002 

4-047 
4-045 
4-042 
4-087 
4-031 
3-93I 
4-037 
4-060 

4-083 



4-059 
4-069 



Balance 
of Trade 
Rs. 1,00,000 
3,556 
2,700 
2,291 
3,486 
3,575 
4,534 
3,854 
3,283 
2,762 
1,176 
1,732 
4,220 
5,141 
5,067 
4,144 
3,596 



Foreign 

Borrowings. 

Indirect 

Estimate* 

Rs. 1,00,000 

409 
1,225 
1,308 
1,337 

577 

179 
1,190 
2,497 
1,029 
2,668 
1,428 
2,465 

728 

565 

535 
1,831 



* The indirect estimate has been preferred to the direct estimate 
because it gives the figures of capital actually imported in India every 
year during the period. The direct estimate is based on the years 
of flotation. But the capital floated in a particular year is not neces- 
sarily imported in the same year. To trace the relation between 
foreign exchange and foreign borrowings we want the estimate based 
on the years of importation. 

sterling funds were at a discount in India, this being due to 
the increasing demand for India's exports and her foreign 
borrowings, the two factors which disturbed the even balance 
between India's credits and debits. It is not, however, possible 
to trace the variations in the exchange due to either of the 
factors severally. 



Foreign Exchange and Gold Movements 149 

As seen in the table the average rate of exchange was below 
par only during four years: 1898-99, 1900-1, 1901-2, and 
1908-9. The unfavourable average rate of exchange in the 
year 1898-99 was due to the fact that the sterling value of the 
rupee, which had been rising since 189535 a result of the closure 
of mints to the free coinage of silver, had not yet reached 
is. 4d. till the middle of that year. It can even be said that 
this improvement in the sterling value of the rupee was brought 
about by the favourable balance of trade of the year. In 1900-1 
it was the decrease in the favourable balance of trade which 
brought about a fall in the exchange rate. The slight improve- 
ment in the exchange rate, still below par, during the next 
year, in spite of heavy foreign borrowings and a large favourable 
balance of trade is apparently anomalous. However, it ceases 
to be so when we know that the marked revival in the favourable 
balance of trade came late in the year, 1 and thus had no pro- 
portionate effect on the average* of the rates of exchange pre- 
vailing during the whole year. It can, therefore, be legitimately 
inferred that simultaneously with the increase in the favourable 
balance of trade and foreign borrowings there was an improve- 
ment in the exchange rate. The circumstances of the year 
1908-9 were exceptional. The American crisis of 1907 over- 
took India in the fiscal year 1908-9 in the form of an un- 
favourable balance of payments and an unfavourable exchange 
caused by a fall in the volume of Indian exports and her 
foreign borrowings. The decrease in the volume of foreign 
borrowings as compared with the preceding year was as im- 
portant a factor in turning the exchange rate as the smaller 
volume of exports. 2 

Excluding these four years the rate of exchange was 
favourable to India throughout the period 1898 to 1913. It 
was the result both of an increasingly favourable balance of 

1 W. L. Thorp, Business Annals, p. 335. 

J. M. Keynes, "Recent Economic Events in India/ 1 19. Economic 
Journal, p. 61. 



150 India's Balance of Indebtedness 

trade caused by the growing volume of exports every year and 
the foreign borrowings which, however, were fluctuating in 
their volume. It is not possible to ascertain the effect of these 
factors separately. 

The range of variations between the fortnightly averages 1 
of the rates of exchange as well as the annual averages was 
very narrow. Even the maximum range to which the exchange 
rate could have fluctuated, i.e. the difference between the 
gold-points, was about 2 per cent. Evidently the fluctuations in 
the exchange rate cannot be supposed to have exerted any 
appreciable influence on the relative volume of Indian imports 
and exports in bringing about the adjustment of her balance 
of indebtedness to her foreign borrowings. 

(2) GOLD MOVEMENTS 

As we have said before, variations in the exchange rate play 
an important part in bringing about the adjustment of the 
even balance of international credits and debits to casual 
disturbances. But in adjusting them to major and continuous 
disturbances, caused, for example, by an increasing demand 
for the export commodities of a country or by an influx of 
foreign capital, their influence is very small. The adjustment is 
necessarily effected in the case of countries on the gold 
standard by gold movements operating directly on the balance 
of payments and, more important, indirectly through their 
effect on the prices of international commodities 2 and, conse- 
quently, on the commodity balance of trade. 

The even balance between India's international credits 
and debits was disturbed in the beginning of the pre-war 
period of the gold-exchange standard by two factors of great 
importance. One was the increasing demand for her exports, 

1 "Statistics of British India," vol. iii, Financial Statistics, pp. 92-95. 

a "International commodities" are the commodities which enter 
into international trade as opposed to the "domestic commodities," 
which do not move between one country and another. 



Foreign Exchange and Gold Movements 151 

and the other the import of British capital. Both these factors 
were operating during the major part of the period of our 
study. The variations in the rupee-sterling exchange between 
is. 4^d. the gold-import point and is. 3f-fd. the gold-export 
point, even if they had been of the maximum extent, could 
not have been a sufficiently powerful factor to adjust India's 
balance of payments to the influence of either of these two 
factors. In fact, the variations in the annual and fortnightly 
averages of the rates of exchange were, as stated before, very 
small. Therefore the adjustment of the balance of payments 
could have been brought about in the main almost wholly 
by means of gold imports through their effects direct and 
indirect on the Indian price-level. But generally the gold 
which India imports in settlement of her favourable balance 
of payments is not used on an extensive scale for internal 
circulation, nor is it kept in bank reserves and mobilized for 
credit and exchange purposes. "It is used for conversion into 
ornaments and for similar purposes; it is also hoarded/' 1 
Even sovereigns and half-sovereigns which were declared legal 
tender in India in 1898 did not form an appreciable portion 
of the currency circulation in India during the pre-war period 
of the gold-exchange standard. 2 All the imports of gold during 
the period of our study cannot, therefore, be supposed to have 
affected the Indian price-level. Only that portion of the 
gold-imports which either went directly into circulation in 
the form of sovereigns or indirectly through Government 
Treasuries and the paper currency reserves in the form of 
silver rupees and notes the chief circulating media of exchange 
in India could have affected prices. 

1 G. Findlay Shirras, Indian Finance and Banking, p. 280. 

* The attempt to introduce sovereigns in circulation made in 
1900-1 failed. But it is reported that sovereigns were being used as 
currency in some of the provinces of India in the closing years of 
our period. Nevertheless their proportion to the total currency 
circulation in India was insignificant. See H. F. Howard, India and 
the Gold Standard ', pp. 28 and 47. 



152 India's Balance of Indebtedness 

Since the closure of mints to the free coinage of silver in 
India the only way of making additions to the currency cir- 
culation was to tender gold to the Government in exchange 
for rupees or notes. The volume of paper currency issued on 
the backing of Government securities was an insignificant 
percentage of the total currency circulation. In 1892 the value 
of the currency notes backed by Government securities was 
Rs. 8,00 lakhs. It increased to Rs. 1,000 lakhs in 1897 to 
Rs. 1,200 in 1905, and to Rs. 1,400 lakhs in 1911. * To get 
rupees in India it was left to the option of those possessing 
gold and requiring rupees in exchange to tender it either to 
the Government in India or to the Secretary of State for India 
in London. The Council Bills in effect were in the nature of 
certificates, stating that the holder of such bills had deposited 
a certain amount of gold with the Secretary of State. The 
Government of India were bound to cash these certificates 
on their presentation to the Treasury. Since the introduction 
of the gold-exchange standard in India the Council Bills had 
been used by the Secretary of State to prevent the flow to 
India of that portion of our gold imports which represented 
a demand for additional currency. This he effected by offering 
Council Bills at rates below the gold-import point. Thus the 
gold which was imported into India, in spite of the Secretary 
of State's offer of Council Bills, must have been mostly for 
industrial uses or for the purposes of hoarding. It had, there- 
fore, no more effect on the price-level in the country than the 
import of any other commodity. 

As the prevention of monetary gold* flowing to India was 

1 Though the securities backing the paper currency in India were 
chiefly to be the Government of India rupee securities, it was decided 
in 1905 that Rs. 200 lakhs and in 1911 Rs. 400 lakhs may be in the 
form of English securities. 

* By the term "monetary gold" we mean the gold which influenced 
the Indian price-level as distinct from the non-monetary gold which 
had no more effect on the Indian price-level than the importation 
of any other commodity. 



Foreign Exchange and Gold Movements 153 

the declared policy of the Secretary of State, and since it was 
carried out by offering Council Bills at rates lower than the 
gold-import point, the amount of Council Bills sold every 
year can be considered to represent approximately the amount 
of monetary gold which could have been imported in India 
in the absence of the mechanism of Council Bills. 1 In fact, even 
though this gold was prevented from flowing to India, the 
price-level in the country was affected in the same way as if 
it actually flowed. That is to say, the gold which was inter- 
cepted by the Secretary of State in London had its full effect 
on the currency circulation in India through the encashment 
of Council Bills in India. To trace how far India's heavy 
surplus of commodity exports and her foreign borrowings 
entered the country in the form of monetary gold, i.e. in the 
form of Council Bills, we give in Table XXXI the relevant 
figures. 

The sale of Council Bills as explained above is the equivalent 
of the flow of monetary gold to India that would have other- 

1 All the Council Bills cashed in India do not represent a net 
addition to the currency circulation. As explained in Chapter V the 
main function of the mechanism of Council Bills is to enable the 
Secretary of State to meet the sterling liabilities of the Government 
of India on account of the Home Charges. In order to meet these 
liabilities the Government of India collect rupees by means of 
taxation. When people pay the taxes for remission to a foreign 
country the currency circulation in the remitting country is reduced 
to that extent. But in India the rupees collected for remission to 
England are again returned into circulation in payment of the Council 
Bills drawn by the Secretary of State. He gets from the Exchange 
Banks the gold he wants to meet his sterling liabilities while the 
Exchange Banks in return get the rupees they need in India. The 
Council Bills which the banks purchase from the Secretary of State 
are paid by means of the rupees collected for remission to England 
and to that extent there is no addition to the currency circulation. 
It can therefore be said that the net addition to the currency cir- 
culation caused by the encashment of Council Bills will be equal 
to the total sale of Council Bills by the Secretary of State minus 
the taxes on account of Home Charges collected by the Government 
of India. 



154 India's Balance of Indebtedness 

wise taken place. The function of the movements of monetary 
gold is to settle the unliquidated balances of payments in 
respect of commodities (including the non-monetary gold) and 
services. India's balance of trade is generally favourable to 
her because of her peculiarly strong position in regard to the 

TABLE XXXI 

COMMODITY BALANCE OF TRADE, FOREIGN BORROWINGS, AND THE 
SALE OF COUNCIL BILLS 



(In lakhs of rupees) 



Year 
1898-99 
1899-00 
1900-01 
1901-02 
1902-03 
1903-04 
1904-05 
1905-06 
1906-07 
1907-08 
1908-09 
1909-10 
1910-11 
1911-12 
1912-13 



Commodity 

Balance of 

Trade 



2,700 
2,291 
3,486 
3,575 
4,534 
3,854 
3,283 
2,762 
1,176 
1,732 
4,220 

5,067 
3,596 



Foreign 
Borrowings 

409 
1,225 
1,308 
1,337 

577 

179 
1,190 

2,497 
1,029 
2,668 
1,428 

2,465 
728 

565 

535 

1,831 



Council Bills 

Sold by the 

Secretary of State* 

2,808 

2,848 

1,998 

2,783 

2,775 

3,568 

3,654 

4,722 

4,989 
2,292 
2,096 

4,102 
3,955 
4,037 
3,850 
4,660 



* Statistical Abstract for British India. 



export trade. 1 But, especially during the period 1898 to 19131 
this normal feature of Indian trade became prominent. First, 
because since the beginning of the present century the foreign 
demands for India's export commodities, which are mostly 
raw materials and foodstuffs, increased rapidly as a result of 

1 Cf. W. L. Thorp, Business Annals, p. 332. 

"With the exception of the years 1856-62 and a short period since 
the close of the war, Indian foreign trade has recorded a large excess 
of exports over imports. " 



Foreign Exchange and Gold Movements 155 

.the rapid industrial development in the West. Secondly, 
because India was importing large amounts of foreign capital 
during the period. As both these factors were working simul- 
taneously it is not possible to ascertain exactly how much 
of the foreign borrowings of India were transferred to this 
country in the form of Council Bills. The increased volume of 
our foreign imports, along with the increase in our foreign 
exports and foreign borrowings, suggests that some part of the 
new capital raised abroad must have entered the country 
in the form of goods, but the heavy sales of Council Bills 
show that a large part of it must have come in the form of 
money. The inference drawn by J. M. Keynes from an analy- 
tical study of India's foreign trade during 1900 to 1908 can 
be cited in support of our statement. He says: "At the earlier 
stage imports, though steadily progressing in value, did not 
leap forward so rapidly, with the result that a larger balance of 
trade remained to be met by the sale of Council Bills. The 
new wave of prosperity seems not unnaturally to have required 
and attracted foreign loanable capital in a more ample stream 
than during the years immediately preceding it, and this cir- 
cumstance, combining with a large excess of exports over 
private imports, swelled the sale of Council Bills to an unpre- 
cedented extent, the influx of new capital being, on the whole, 
the more important factor of the two." 1 This statement of 
Keynes seems to be a little exaggerated, nevertheless, it does 
indicate that the demand for Council Bills was at least partially 
caused by India's foreign borrowings. 

SUMMARY 

The conclusions of this chapter can be summarized as follows : 

First, as the two disturbing factors the increased foreign 

demand for India's exportable commodities and her foreign 

1 J. M. Keynes, "Recent Economic Events in India/' 19. Economic 
Journal, 1909. 



156 India's Balance of Indebtedness 

borrowings were working simultaneously, the process of 
adjustment to their individual influence could not be traced 
separately. 

Secondly, adjustment to both these disturbing factors was 
brought about in the same way. The rupee-sterling exchange 
was favourable to India during the major part of the period 
under consideration, and the sale of Council Bills, which played 
the part of gold movements in India, was very large through- 
out the period, except on one or two occasions. 

Thirdly, in keeping the rupee-sterling exchange favourable 
to India and in creating a large demand for Council Bills to 
settle her balance of payments, foreign borrowings had some 
influence along with the increased commodity exports. 



CHAPTER VII 

CHANGES IN RELATIVE PRICE-LEVELS AND THE 
ADJUSTMENT OF THE BALANCE OF PAYMENT 

IN gold-standard countries the readjustment of the balance 
of payments disturbed by more or less permanent factors like 
an increase in the foreign demand for exports or in the amount 
of foreign borrowings is brought about by means of gold move- 
ments and changes in relative price-levels, which in their turn 
influence the commodity balance of trade. The importation 
of gold under the gold standard involves a change in the in- 
comes "spendable" by the people of the countries concerned. 
For example, if the people of A borrow an additional X million 
rupees from the people of B,the former have X million more 
to spend and the latter X millionjess. Having more to spend 
altogether, the demand of the people in A for foreign goods 
as well as for the goods produced in their own country increases, 
while the reverse happens in B where people have now less 
to spend. The increase in the effective demand of A for goods 
in general, foreign and domestic, raises its price-level, while, 
on the other hand, the fall in the effective demand of B lowers 
its price-level. 1 If the volume of foreign borrowings of A 
remains constant for a long period, the relative changes in 
the "spendable incomes" and consequently in the price- 
levels in the borrowing and the lending countries bring about 
an excess of commodity imports into A from B equal to the 
amount of A's foreign borrowings, and further gold move- 
ments from B to A are stopped. The favourable balance of 
payments caused by the increase in foreign borrowings is in 
the beginning settled by an inflow of gold, but ultimately by 
a change in the commodity balance of trade. Similar will 
be the case if the favourable balance of payments is caused by 
1 Barrett Whale, International Trade, p. 78. 



158 India's Balance of Indebtedness 

an increase in the foreign demand for A's exportable com- 
modities. 1 

Under the gold-exchange standard as it prevailed in India 
during the pre-war period, the immediate settlement of her 
large favourable balances of payment caused by both the 
factors mentioned above working simultaneously, was brought 
about mainly by the sale of Council Bills. In the transmission 
of "spendable income" to India these bills played the same 
part which gold imports would have played had India been 
on the gold standard. Naturally, we should, expect an increase 
in the spendable income of India due to her increased foreign 
borrowings and the increasing foreign demand for her export- 
able commodities during the period of our study to force 
up the price-level. At the same time, because India's capital 
imports during the period under consideration were almost 
wholly from the United Kingdom, we should expect the 
prices there to display a falling tendency. However, it is note- 
worthy in this connection that there was a world-wide rise in 
prices between 1897 and 1914, due to a general business 
prosperity, which was only punctuated by the crisis of 1907. 2 
Therefore, what we should expect (according to the theory of 

1 The process of readjustment is similar in the two cases. But 
the final results are not the same. In the case of foreign borrowings 
as well as of increased demand for exports, the preliminary gap 
between "incomes'* and payments is ultimately restored by an 
expansion of imports. But in the case of foreign borrowings the margin 
may be filled up in part by a contraction of exports, which is, of 
course, by hypothesis impossible in the other case. Again, in the case 
of foreign borrowings the commodity balance of trade is never 
restored, but this happens in the case of increased demand for exports. 

3 W. C. Mitchell, Business Cycles, p. 78. Also compare W. T. 
Layton, An Introduction to the Study of Prices, p. 83. "The features 
of the price curve since the last upward movement began are the 
booms of 1900 and 1907 with a considerable depression in the 
intervening years, and since 1907 a drop with a further rise to the 
highest point in 1913. Thus there are two fairly long cycles and a 
short one which has probably not yet reached its climax. But whether 
one looks to the maximum points or to the bottom points of these 
three cycles, there is shown an equally steady upward movement." 



Changes in Relative Price-Levels 159 

relative price-levels as a factor in the mechanism of adjust- 
ment) is not a rise of prices in India and a fall of prices in 
Great Britain, but a relatively greater rise in India than in 
Great Britain. 

INDEX NUMBERS OF INDIAN PRICES 

An index number of prices is a measure of the composite 
effect of the numerous forces which cause prices of individual 
commodities to rise or fall. There are four Index Numbers of 
wholesale prices in India available for the period of our study : 

(i) Atkinson's Index Number. 

(ii) The Official Index Number prepared by the Depart- 
ment of Statistics, Government of India, 
(iii) The Indices prepared by the Prices Enquiry Committee. 

Atkinson's Index Number is calculated from in prices of 
48 commodities; 60 prices representing articles of food, 29 
prices representing raw materials, n prices representing 
manufactures, and n prices representing imported articles. 1 
The weights are assigned according to the production and 
imports of the selected articles during the year 1893. The 
Index Number was published by its author in the Jourral of 
the Royal Statistical Society, September 1909, and has since 
then been compiled by the Department of Statistics on the 
same lines. The main criticism of Atkinson's Index Number 
is that it does not use variable weights. However, as a rough 
indication of the trend of prices in India during the pre-war 
years of the twentieth century, it may be accepted as more 
reliable than any other unweighted Index Number. 

The Official Index Number is compiled from the price 
quotations of 39 staple commodities, n imported and 28 
exported, and the base year selected in 1873. The articles are 

1 F. J. Atkinson, "Rupee Prices in India, 1870 tojpoS," 72. Journal 
of the Royal Statistical Society , p. 497. 



160 India's Balance of Indebtedness 

selected according to their domestic importance rather than 
their prominence in the foreign trade of India. The "articles 
of export' ' include 9 foodstuffs, 15 raw materials, and 4 manu- 
factured articles. The greatest drawback of this Index Number 
is that it assigns equal weights to all the commodities it includes. 

The Prices Enquiry Committee has selected "as many as 
possible of the main staple articles of Indian production and * 
consumption" for the preparation of their Index Numbers. 
In all, the number of articles with their varieties counted 
separately comes up to 140. They have been classified as 
(i) cereals; (ii) pulses; peas or split peas; (iii) sugars; (iv) tea 
and coffee; (v) other articles of food, (a) condiments and 
spices, (b) animals and animal produce, (c) others; (vi) oil 
seeds, oils and oil cakes; (vii) textile jute; (viii) textile cotton; 
(ix) other textiles ; (x) hides and skins ; (xi) metals ; (xii) other 
raw and manufactured articles; (xiii) building materials. 1 
The Committee prepared two Indices, one Weighted and the 
other Unweighted, with the quinquennium 1890-4 as the 
base period. The weights assigned to the commodities in the 
Weighted Index Number are calculated for every quinquennium 
since 1890. 

In general, statisticians support the use of Weighted in 
preference to Unweighted Index Numbers as measures of the 
general trend of prices, if the weights used are not wholly 
arbitrary but related even though very roughly to the relative 
importance of the commodities included in the Index.* 
Accordingly, Atkinson's Index and the Weighted Index of 
the Prices Enquiry Committee are preferable to the Official 
Index and the Unweighted Index of the Prices Enquiry Com- 
mittee. Again, between these two a choice has to be made. 
The weights of Atkinson's Index Number are based on the 
importance of the commodities selected by him, in a par- 

1 Report on the Enquiry into the Rise of Prices in India, vol. i, p. 71. 
* J. Viner, Canada's Balance of International Indebtedness, 1900-13, 
p. 224. 



Changes in Relative Price-Levels 161 

ticular year, viz. 1893. Under the rapidly changing conditions 
of production and trade which characterized the pre-war 
period of the gold-exchange standard in India the importance 
and, consequently, the weights of her different staple com- 
modities cannot be expected to remain unaltered over a long 
period. In fact, the weights of commodities like rice, sugar, 
indigo, and coal did change considerably during the period 
1893 to 191 3. x Hence, the Weighted Index Number of the 
Prices Enquiry Committee which uses varying weights would 
be more satisfactory than Atkinson's Index Number which 
uses constant weights. For the sake of this study we shall, 
therefore, use Atkinson's Index Number and the Weighted 
Irfdex Number of the Prices Enquiry Committee, but pre- 
dominantly the latter in preference to all the other Indices of 
wholesale prices in India. 

INDEX NUMBERS OF WHOLESALE PRiCES IN THE UNITED KINGDOM 

For the United Kingdom the Official Index Number of the 
Labour Department, Board of Trade, and Sauerbeck's Index 
Number would be used. Here, however, it is necessary to 
bear in mind that both these indices as well as the Index 
Number of the Economist are constructed mainly from the 
price quotations of raw materials and foodstuffs which are 
largely import commodities in that country. 2 In a creditor 
country during a period of increasing foreign lending, such as 
was the period 1898-99 to 1913-14 for the United Kingdom, 
import prices should rise relatively to domestic and export 
prices.3 Moreover, after 1900 the rise in prices all over the 

1 C. N. Vakil and Muranjan, Currency and Prices in India, pp. 306, 

307- 

1 Cf. A. W. Flux, "Measurement of Price Changes," 74. Journal 
of the Royal Statistical Society, p. 169. "Of the 47 price series used 
in constructing the British Board of Trade Price Index 35 are not 
only for import commodities but are the average import values." 

3 C. K. Hobson, The Export of Capital, p. 219. 

L 



India* $ Balance of Indebtedness 

DATA OF CHART I 
INDICES OF WHOLESALE PRICES FOR INDIA AND UNITED KINGDOM 



India 
Atkinson's 
Year Index* 


India 
Prices 
Enquiry 
Committee] 


United 
Kingdom 
Labour 
Department 
Board of 
Trade.l 


United 
Kingdom 
Sauerbeck.^ 


1898-99 


100 


IOO 


IOO 


IOO 


1899-00 


97 


100 


99 


106 


1900-01 


114 


112 


108 


117 


1901-02 


in 


no 


104 


no 


1902-03 


102 


1 06 


104 


109 


1903-04 


99 


105 


1 08 


109 


1904-05 


96 


1 06 


1 06 


no 


1905-06 


108 


U3 


1 06 


H3 


1906-07 


127 


128 


109 


I2O 


1907-08 


134 


133 


114 


126 


1908-09 


143 


132 


in 


114 


1909-10 


129 


122 


112 


116 


1910-11 


1 20 


124 


117 


123 


1911-12 


"5 


125 


117 


126 


1912-13 


139 


132 


124 


133 


I9I3-H 


146 


140 


126 


133 



* F. J. Atkinson's Index Number of Indian prices in prices of 
48 commodities, weighted (60 articles of food, 19 raw materials, 11 
manufactured articles, and 11 imported articles) adjusted to 1898-99 
= 100. 

t Prices Enquiry Committee 102 articles, weighted, adjusted to 
1898-99 = loo. 

J United Kingdom Labour Department, Board of Trade 47 
articles, chiefly raw materials and foodstuffs, weighted adjusted to 
1898-99 = loo. 

United Kingdom, Sauerbeck Unweighted Index of 32 commodi- 
ties, chiefly raw materials and foodstuffs adjusted to 1898-99 = 100. 



Changes in Relative Price-Levels 



163 



CHART I 
INDICES OF WHOLESALE PRICES IN INDIA AND UNITED KINGDOM 



164 Indicts Balance of Indebtedness 

world was more marked in the case of raw materials and food- 
stuffs than in the case of manufactured articles. 1 The price 
indices that we shall use are, therefore, likely to exaggerate the 
rise in British prices. 

Chart I represents a comparison between the courses of 
wholesale prices in India and in the United Kingdom. 

Even if no allowance is made for the exaggeration of the 
upward trend by the British price indices, the Index of the 
Prices Enquiry Committee shows an upward tendency rela- 
tively to the Official Index Number of British prices, except 
for the solitary year 1903-4. So also the Indian Index as 
compared with Sauerbeck's Index Number for the United 
Kingdom reveals the relatively higher level of Indian prices, 
except in the years 1899 to 1901 and 1902 to 1904. Therefore, 
if we could make allowance for the defect of the British price 
indices, Indian prices would have been still higher than 
British prices throughout the period of our study. How far the 
relatively greater rise in Indian prices was due to the import 
of foreign capital, and how far to the increased foreign demand 
for India's exportable commodities, it is not possible to decide 
quantitatively. At the same time it cannot be controverted that 
the import of foreign capital was one of the factors responsible 
for adding to India's "spendable income" and, consequently, 
for raising her price-level. Almost the whole of the existing 
literature on Indian currency and prices seems to have dis- 
regarded this factor in attributing the rise of Indian prices 
solely to the currency policy of the Government. Similarly, 
writers who have attributed the rise of prices wholly to in- 

1 WORLD RISE IN PRICES 

Raw Manufactured 

Year Foods Materials Articles 

1900 loo 100 loo 

1912 134 136 117 

1913 126 130 118 

R. H. Coats, Canadian Cost of Living, Report, vol. ii, p. 247. 
Quoted by J. Viner, op. cit., p. 221. 



Changes in Relative Price- Levels 165 

creased foreign demand for India's export commodities, are 
open to the same criticism, though in a lesser degree. Mr. J. 
M. Keynes only has put forward the theory that "apart from 
the fluctuations of f e seasons, the Indian level of prices is 
most influenced at the present time (that is 1900-9) by the 
extent to which Europe makes her investments there/' 1 He 
is understood to have later modified his position to some 
extent, but still believed that the influence of foreign invest- 
ments in India on her price-level was appreciable. 2 



SECTIONAL PRICE-LEVELS 

The movement of relative price-levels in the borrowing and the 
lending countries bring about the adjustment of the balances 
of payment through their effect on the commodity balance of 
trade. A rising price-level in the borrowing country encourages 
imports and discourages exports so that the balance of pay- 
ments due to it is ultimately settled by an excess of commodity 
imports over exports equal to the volume of its annual foreign 
borrowings. The method of operation of price changes in the 
adjustment of the balances of payment can, however, be more 
clearly understood by comparing the different trends of the 
sectional price-levels. In passing, however, it need be said 
that the volume of India's foreign trade is less than 10 per 
cent of the volume of her domestic trade. Besides, the vast 
extent of the country, its enormous and immobile population, 
the sluggish character of its entire economic life make it 
possible for marked changes to take place in international 
transactions with much retarded effects on domestic trade. 
Through long periods foreign exchange, imports and exports, 
and the prices of imported and exported goods, could vary 
as if they were quite in a realm of their own, separated by a 

1 J. M. Keynes, "Recent Economic Events in India," Economic 
Journal^ 1909, p. 67. 

* Report on the Enquiry into the Rise of Prices in India, vol. i, p. 96. 



1 66 India's Balance of Indebtedness 

wide gulf from the prices of Indian domestic goods and from 
the money incomes of the great mass of people. "Our ascetic 
ideals and our not very high standard of living prevent the 
adjustment of our balances by the increase of commodity 
imports. " x The sectional price-levels, therefore, cannot be 
expected to offer any completely reliable proof or disproof of 
the theory relating to the adjustment of the balances of payment. 
. Theoretically, the increase in the spendable income of the 
people in India will cause a rise in the prices of commodities 
produced for the internal market and of services. The prices 
of imported commodities will not be appreciably affected by 
changes in Indian conditions, since they are largely governed 
by conditions in the producing countries. If anything, the 
prices of articles imported from the capital-lending country 
would show a downward tendency. The relative rise in the 
prices of domestic commodities will not only make imported 
commodities which are different in kind from the domestic 
commodities more attractive to the Indian purchaser, but 
may even lead to a substitution by consumers of imported 
commodities for domestic commodities of the same class, thus 
shifting these commodities from the domestic to the import 
class. 2 Other things being equal, there will also be a decrease 
in Indian exports. The prices of exportable commodities, 
except in the few cases where a great proportion of the world's 
supply is contributed by India, are mainly determined by the 
"ruling markets" in the consuming countries, ultimately by 
world- wide relations between supply and demand. The rise 
in the prices of domestic commodities and services in India 
will raise the money-cost of production of the export com- 
modities. If the producers succeed in raising the prices of their 
commodities in sympathy with the increased cost of pro- 
duction, it will lead to a diminution of exports and even to the 
cessation of exports and the shift of the commodities from the 

1 J. C. Coyajee, Indian Currency System, 1835-1925, p. 166. 
* J. Viner, op. cit., p. 228. 



Changes in Relative Price-Levels 167 

export to the domestic class. If the producers do not succeed 
in raising the prices of their commodities pan passu with the 
increased cost of production, they would turn to other activities, 
and in the extreme case the commodities may even shift from 
the export to the import class. If production in India does 
not keep pace with the increase in purchasing power a greater 
proportion of the domestic supply will be consumed in India 
and thus there will be a reduction in the "surplus" available 
for export. The ultimate result of all these price changes will 
be the creation of an unfavourable commodity balance of 
trade or, what will be more true in the case of India, a reduction 
in her normal favourable balance by an amount equal to the 
volume of her annual foreign borrowings. 



DOMESTIC, IMPORT, AND EXPORT PRICES IN INDIA 

Domestic commodities are commodities which do not enter 
in significant amounts into international trade either in the 
form of imports or of exports. The number of such com- 
modities is generally very large, and in all countries probably 
much exceeds that of commodities having a world range of 
prices. Many things, such as stone, bricks, timber, etc., because 
of their great bulk in proportion to their value, are very costly 
to transport over any considerable distance. Many things, 
such as milk, butter, eggs, fruits, vegetables, are perishable. 
"No doubt modern improvements in the transportation of 
bulky goods and in the preservation of those that are perishable 
tend to enlarge the sphere of foreign trade. But such things 
are still sold mainly in their own region and at the prices of 
their own region." 1 There are also commodities like land and 
buildings which are immovable, and there are services having 
limited mobility, because they cannot be separated from the 
persons rendering them, the prices of which cannot therefore 
be directly subject to foreign competition. The prices of all 

1 F. W. Taussig, Free Trade, Tariff, and Reciprocity, pp. 73, 74. 



1 68 India's Balance of Indebtedness 

these commodities as well as services are determined by 
domestic conditions. In India, which is a continent by itself, 
the number of commodities belonging to the domestic class 

DATA OF CHART II 
INDICES OF DOMESTIC, IMPORT, AND EXPORT PRICES 

Domestic Import Export 

Prices Prices Prices 

Price of 10 Articles 16 Articles 

Year Labour* Weighted^ Weightedl 

1898-99 100 100 100 

1899-00 104 98 no 

1900-01 108 113 116 

1901-02 no in 114 

1902-03 113 109 in 

1903-04 115 112 112 

1904-05 118 120 119 

1905-06 123 120 118 

1906-07 127 123 150 

1907-08 134 132 139 

1908-09 139 126 136 

I9O9-IO 145 121 141 

1910-11 147 130 158 

1911-12 155 139 171 

1912-13 157 144 181 
1913-14 161 145 193 

* Prices Committee Report Index Number of Wages. 

t Compiled from the prices quoted by the Prices Committee Report 
and by the Department of Statistics in India 10 articles (refined 
sugar, kerosene, piece-goods grey, white and coloured; twist and 
yarn, woollen piece-goods, raw silk, silk piece-goods, liquors) weighted 
1898-99 = 100. 

J Compiled from the prices quoted by the Prices Committee Report 
and by the Department of Statistics in India 16 articles (rice, wheat, 
tea, coffee, linseed, til seed, raw cotton, twist and yarn, raw jute and 
gunny bags, raw wool, dressed skins, raw hides, opium, indigo, rape 
seed) weighted 1898-99 100. 

is indefinitely large. The Prices Enquiry Committee have 
collected price quotations for some of these commodities, 
but they have not prepared any special index to show the 
trend of their prices. To prepare a weighted index of domestic 
commodity prices in India is a very arduous task, and even 



Changes in Relative Price- Levels 169 

CHART II 
INDICES OF DOMESTIC, IMPORT, AND EXPORT PRICES 




170 India's Balance of Indebtedness 

then it will probably not yield satisfactory results because of 
the incompleteness of the data. However, since the essential 
requisite of the commodities belonging to the domestic class 
is their immobility between one country and another, the 
prices of services which have no greater mobility than the 
persons rendering them can very well be considered as an 
important index of the trend of domestic prices. "The trend 
of wages, if allowance be made for the probability that wages 
will show considerable inflexibility during periods of fluctua- 
tion in general price-levels, offers perhaps the best single 
index of the trend of domestic prices in general." 1 Therefore 
in the absence of a special index we shall use the index number 
of wages in India prepared by the Prices Enquiry Committee 
to represent the trend of domestic prices. It includes industrial 
wages and the wages of skilled labourers, unskilled labourers, 
and domestic servants in urban areas and cities. 

To examine the course of import and export prices we have 
prepared weighted index numbers from the declared whole- 
sale prices of important commodities. The weights assigned 
are based on the importance of the commodities according 
to value in the import and export trade of India every year 
during the period of our study. 

The course of domestic, import, and export prices in India 
during 1898 to 1913 is represented in Chart II. 

Chart II indicates a general upward trend of all the sectional 
price-levels. This was due, as already explained, to the world- 
wide business prosperity that characterized the pre-war 
period of the present century. But among the prices repre- 
sented in the Chart, export prices show the greatest rise and 
import prices the least. The course of domestic prices is mid- 
way between the two. The prices of imported articles are 
determined mainly by the conditions ruling in the country 
or countries which produce them. As more than 75 per cent 
of our imports during the period under consideration were 
1 J. Viner, op. cit., p. 247. 



Changes in Relative Price- Levels 171 

from Great Britain, a capital lending country, and as India 
was a capital borrowing country, theory would expect the 
prices of domestic commodities in India to rise relatively to 
the prices of imported commodities. But the rise of export 
prices over domestic prices is anomalous. The import of 
capital into India is inconsistent with the tremendous rise in 
the prices of Indian exports. This suggests, however, that 
there was some other factor in operation whose influence out- 
weighed the effect of foreign borrowings on Indian prices. In 
fact, the relatively greater rise in the price of Indian exports 
was due to the "immensely enhanced" demand for them 
during the period under study. 1 The demand for our exports 
was all the while moving up by leaps and bounds ; and that is 
why the volume of our exports increased pan passu with the 
increase in their prices. This fact also explains why the expecta- 
tion of theory in regard to the effects of foreign borrowings on 
the sectional price-levels in the borrowing country was not 
fulfilled by the course of sectional prices in India during 
1898 to 1913. 



THE GENERALLY PREVAILING EXPLANATION OF THE RISE OF 
PRICES IN INDIA 

Our discussion, though directly concerned with the effect of 
foreign borrowings, incidentally sheds considerable light 
upon a very controversial aspect of Indian currency history 
during the period of our study. 

Almost all writers on Indian currency have attempted to 
analyse and discover the causes of the rise of prices in India 
during 1898 to 1913. It appears, however, that the primary 
objective of quite a large section of these writers was to dis- 
credit the gold-exchange standard system which was brought 
into operation in India in 1900. The rise of prices in India 
was put forward as a definite proof of their contention that 

1 J. C. Coyajee, The Indian Currency System, 1835-1925, p. 169. 



172 Indicts Balance of Indebtedness 

the gold-exchange standard system was less automatic in its 
functioning than the gold-standard system, that it left to the 
Government, which managed the currency organization, a 
large scope for currency manipulation, and that while it 
provided plenty of openings for the volume of currency in 
circulation in the country to expand, there were no methods by 
which the currency circulation could be contracted auto- 
matically. In short, it was maintained that the inflation of 
currency, the immediate cause of the rise of prices was made 
possible by the new monetary system, and that it would have 
been impossible had there been a gold standard and a gold 
currency instead of a gold-exchange standard with token 
rupees in circulation. 1 As Professor Nicholson, the foremost 
critic of the gold-exchange standard system in India, puts it: 
"In the case of gold, there are natural economic forces which 
in time must limit the monetary supply and so far the level of 
prices.** Thus the problem of Indian prices during the pure 
gold-exchange standard period has been assumed by these 
writers to be essentially connected with the particular type of 
monetary organization adopted by the country. Foreign 
borrowings and the increased volume of our exports during 
the period of our study have not been given any consideration 
whatsoever as factors affecting currency circulation in India 
and consequently the prices. 2 

1 C. N. Vakil and Muranjan, Currency and Prices in India, p. 326. 

"As pointed out already the medium of circulation had now come 
to depend upon the will of the administrators of the country. It is 
the acts or the policy of those who govern this country that has 
determined the course of prices in India ever since 1893." 

8 In their hurry to criticize the Government for what they believe 
to be the mismanagement of currency without taking into considera- 
tion all the relevant factors, writers in India have a good parallel 
in Argentina. The following passage from a study of Argentine 
International Trade Under Inconvertible Paper Money, 1880-1900, 
by J. H. Williams, bears out this statement: 

"It has been a fairly common remark among Argentine writers 
on economic problems that the vicissitudes of Argentine paper money 
history have had nothing to do with borrowing operations, or with 



Changes in Relative Price- Levels 173 

To substantiate their contention that the rise of prices in 
India was due to the gold-exchange standard and its mani- 
pulation by the Government, writers on Indian currency 
compare the movement of price-levels in India with those of 
price-levels in Great Britain. 1 But the fact that Indian prices 
rose relatively to British prices during the period, while it 
suggests that the divergence may be due to differences in the 
currency systems does not at all prove it. Had it not been for 
their preoccupation with the alleged defects of the Indian 
currency organization, these writers would have looked for 
less plausible but more reasonable explanations of the diver- 
gence. During the period of our study, i.e. 1898 to 1913, 
India was a capital-importing country, while Great Britain 
was a capital-exporting country. This difference in the inter- 
national position of the two countries was itself sufficient to 
bring about a divergence between the movements of their 
price-levels. 2 Therefore, this divergence between the prices 

the balance of international payments. When in 1890 the gold premium 
was shooting up by leaps and bounds, the Paris correspondent of 
La Nation reported to his paper an interview with various European 
bankers in which the bankers took the view that the crisis, and the 
premium on gold, was fundamentally due to the inability of Argentina 
to meet its enormous liabilities of interest owed abroad; the cor- 
respondent added the characteristic sentence: 'In Argentina, on the 
contrary, every one knows that the crisis is due to bad government, 
to bad political and financial administration, and to excessive issues 
of paper money.' " 

1 B. R. Ambedkar, The Problem of the Rupee, pp. 199-200. 

* J. Viner, Canada* s Balance of International Indebtedness, 1900-15, 
p. 218. 

"The countries grouped in ascending order according to the 
degree of buoyancy which their prices showed are as follows : (i) Great 
Britain, France, Italy, Belgium, Holland, and Norway; (ii) Germany, 
Austria, Russia; (iii) India, Australia, New Zealand; (iv) Japan, 
Hungary, the United States, and Canada. Although it is not to be 
contended that the international movement of capital is the sole 
factor determining the trend of price- levels in different countries, 
it is significant that in general the capital-lending countries experienced 
the least rise in prices and the capital- borrowing countries the 
greatest rise." 



174 India's Balance of Indebtedness 

ruling in India and Great Britain cannot be attributed to the 
different currency systems of these countries. It was essentially 
due to their relations in the international capital market and 
hence cannot be invoked to prove the merits or demerits of a 
particular system of currency. The trend of prices in Canada 
and the United States of America lends support to this con- 
tention. For both of these countries were on a gold-standard 
.basis and yet the divergence between their price-levels and the 
price-level in Great Britain during 1898 to 1913 was the 
greatest. Here, again, the explanation is to be found in the 
different relations of these countries in the international 
capital market Canada and the United States of America 
were borrowing heavily from Great Britain. Whatever the 
system of currency obtaining in a country an import of foreign 
capital is bound to raise its price-level. 

Another explanation of the rise of prices in India during 
the pre-war period, without reference to the particular currency 
system which existed in the country, is put forward by Sir J. 
C. Coyajee. He maintains: "Whatever might be the currency 
system of a country, large gains from international trade make 
a country of higher level of incomes, and under certain cir- 
cumstances (e.g. inefficiency of labour in certain directions or 
prevalence of diminishing returns) of high prices. These 
factors would be sure to affect prices even under a gold-cur- 
rency system, especially in an undeveloped country like India, 
producing mainly raw materials of industry which are subject 
to the law of diminishing returns." 1 As we already know, 
due to the general business prosperity of the world and the 
industrial expansion of a great many countries, the demand for 
India's export commodities mainly raw materials was fast 
increasing. This increased demand for the export commodities 
raised their prices, and the rising tendency of prices which 
reflects the increasing intensity of foreign demand was kept 
till the outbreak of the war. Naturally the gains of India were 

1 J. C. Coyajee, The Indian Currency System, 1833-1923, p. 160. 



Changes in Relative Price-Levels 175 

very large. First, the volume of her exports was increasing and, 
secondly, her export commodities were being sold at an 
increasing level of prices. The large favourable balances of 
trade which were the direct result of this advantageous position 
of India in the international market were liquidated by the 
sale of Council Bills. On presentation to the Treasury these 
bills were cashed in rupees which constituted additions to the 
volume of currency circulation in the country. 1 Since additions 
to the currency circulation in India during the period of the 
gold-exchange standard were made chiefly by means of Council 
Bills, writers on Indian currency who maintain that there was 
inflation of currency attributed the phenomenon to the un- 
usually large sale of Council Bills by the Secretary of State. 
But the sale of Council Bills was only the mechanism by 
which the impact of outside international forces was being 
transmitted to the various parts of the internal economy in 
India, chiefly to the price organization. The demand for 
Council Bills was really a demand for purchasing power in 
India, which was created not By the management of her parti- 
cular currency system, but by her foreign borrowings, and 
still more, by the increasing international demand for her 
exports. So long as these factors were active, their influence 
would have been felt upon the Indian price-level, irrespective 
of the monetary organization obtaining in the country. And 
if this is a rational and sufficient explanation of the pheno- 
menon under discussion, surely to establish the statistical 
fact that Indian prices rose more than the British during the 
pre-war years of this century, does not at all prove the point 
that the greater rise of the Indian prices was in any way due 
to the peculiarity of the Indian currency organization. 

It is evident, then, that the true causal sequence ran during 
the period from the growing and intense demand for a number 
of Indian products supplemented by foreign borrowings, 

1 For an explanation of the net addition to the currency circulation 
effected by means of Council Bills, see footnote on p. 153. 



176 India's Balance of Indebtedness 

through an increase of currency, to the general rise of prices in 
India. The rise of prices in India was due to her foreign borrow- 
ings and to the foreign demand for her export commodities; 
and it was able to sustain itself over a long period, because the 
foreign demand for India's export products was becoming 
more and more intense. The main factor in the situation the 
advantageous position which India occupied in her foreign 
trade was steadily becoming more conspicuous, through 
more than a decade of the world's commercial and industrial 
prosperity, 

SUMMARY 

The results of the analysis of relative price-levels undertaken 
in this chapter may be presented as follows : 

(i) First, as a result of the increased purchasing power in 
India due to her foreign borrowings and her advantageous 
position in foreign trade, there was a rise in the general price- 
level. At the same time as a result of the diminished purchasing 
power in Great Britain the capital-lending country during 
the period of our study the rise in her general price-level 
was relatively less. 

(ii) Secondly, the sectional price-levels in India during this 
period also showed a general upward tendency. Export prices 
mounted very high, followed by domestic prices and import 
prices in the order of their buoyancy. 

(iii) Finally, export prices displayed the greatest rise because 
of the increasing foreign demand for India's export com- 
modities during the period, which more than outweighed the 
influence of foreign borrowings in the opposite direction. 



CHAPTER VIII 

ADJUSTMENT OF THE BALANCE OF PAYMENT 
AND THE BARTER TERMS OF TRADE 

COMMODITY BALANCE OF TRADE 

IN bringing about the final adjustment of international balances 
of indebtedness to more or less permanent disturbances the 
commodity balance of trade is by far the most important 
single factor. Specie imports and exports, as items in the 
commodity balance of trade, are only a preliminary phase 
in the adjustment. "They exert their main influence, not 
through the effect on the balance of payments of their own 
values as debits and credits, but by their influence on price- 
levels and through them on the remaining items in the com- 
modity balance of trade/ 11 * 

So far as invisible items in the balance of payment are 
concerned changes in price-levels have no appreciable influence 
on them. International transactions in services are very little 
affected by them. Tourists' expenditure and insurance trans- 
actions also do not show any influence of the changes in 
exchange rates and prices. The amount of freight charges 
payable abroad or receivable from abroad by a given country 
is directly determined by the volume of its foreign trade, by 
the proportion in which that trade is carried on by foreign or 
national shipping companies and by the amount of trans- 
portation business done for other countries as well as by freight 
rates. When factors like continued foreign borrowing from 
abroad, or increased foreign demand for its export com- 
modities disturb a country's international balance of indebted- 
ness, they affect its balance of freight payments mainly through 

1 J. Viner, op. cit, p. 256. 
M 



178 India's Balance of Indebtedness 

their influence on the volume of commodity transactions, 
although they may influence the extent to which that country's 
capital and labour is engaged in the carrying business. Interest 
payments are determined simply by the amount of capital 
borrowings, the rates of interest agreed upon and the extent 
to which debtors respect their contractual obligations. 

Non-commercial transactions like immigrants' and emi- 
grants' remittances and the movements into and out of a 
country of migrants' personal effects, because of their non- 
commercial character are wholly free from the influence, 
direct or indirect, of any factors disturbing the international 
balance of payments. Only the capital brought in by immi- 
grants is a possible exception. For an increase in foreign 
borrowings or in the foreign demand for export commodities 
brings about in the borrowing country a situation favourable 
to an inflow of foreign labour. 1 

It follows from this that when a disturbing factor of sufficient 
importance and long- continued duration, such as Indian 
borrowings abroad during 1898 to 1913, upsets the even balance 
between her debit and credit international obligations, an even 
balance of payments is restored and maintained in spite of the 
debit balance of indebtedness mainly through compensatory 
variations in the commodity balance of trade. Specie move- 
ments and transfers of securities and bank deposits are im- 
portant in the final adjustment of the balance only when the 
disturbances to the even balance of payments are casual and 
temporary. Transfers of securities and bank desposits do not 
play an important part in the adjustment of the balance of 
payments to a continued debit or credit balance of indebted- 
ness, since they themselves are merely representative of some 

1 A. C. Whitaker, "The Ricardian Theory of Gold Movements," 
1 8. Quarterly Journal of Economics, 1904, p. 231. 

"The investment of capital abroad, the travel of tourists, and all 
the other factors outside of the balance of trade itself are the com- 
paratively independent variables, the balance of trade in goods is 
the compensatory variable in the balance sheet of total indebtedness* 1 ' 



Adjustment of the Balance of Payment 179 

of the items in the balance of indebtedness to which adjustment 
must be made. 

The shift in the commodity balance of trade necessary to 
bring about the adjustment of the balance of indebtedness to 
foreign borrowings is caused, as explained in the preceding 
chapter, by the influence of changed money incomes and 
prices on commodity imports and exports. In the borrowing 
country the money incomes and prices rise, while in the 
lending country they fall. In the borrowing country the prices 
of imported articles tend to go down, while the prices of 
domestic and exported articles tend to rise. The falling prices 
of the imported articles and the rising money incomes en- 
courage imports, while the rising prices of the exported com- 
modities discourage exports. This process, provided the annual 
amount of foreign borrowings remains constant, brings about 
an unfavourable commodity balance of trade or a reduction in 
the normal favourable balance of trade equal to that amount. 
Thus ultimately foreign capital enters the borrowing country 
in the form of commodities. We have already seen that changes 
in the sectional price-levels of India as a result of her foreign 
borrowings would have been as predicted by theory but for 
the simultaneous influence of another factor, viz. increased 
foreign demand for India's export commodities. Now, let us 
see how far the commodity imports and exports of India 
were affected by changes in her sectional price-levels, and 
how far the adjustment of the balance of indebtedness to 
foreign borrowings was brought about according to the 
expectations of theory. The relevant data are presented in 
Table XXXII. 

In trying to find out a correlation between India's foreign 
borrowings and her commodity imports and exports as given 
in the following table a crucial point must not be lost sight of. 
When the theory states that the ultimate adjustment of the 
balance of indebtedness to foreign borrowings is brought about 
by a shift in the commodity balance of trade it assumes certain 



180 India's Balance of Indebtedness 

things. First, it assumes that before a country begins to raise 
foreign loans there exists an even balance between her credit 
and debit obligations and, secondly, that the foreign borrow- 
ings continue for a long period at an even rate. In the case of 
India during the period of our study the second of these 
assumptions did not hold good. Both the direct as well as the 

TABLE XXXII 

COMMODITY IMPORTS AND EXPORTS, FOREIGN BORROWINGS AND THE 
SALE OF COUNCIL BILLS 

(In lakhs of rupees) 











Council Bills 










Sold by the 




Commodity 


Commodity 


Foreign 


Secretary 


Year 


Imports 


Exports 


Borrowings 


of State 


1898-99 


8,465 


12,021 


409 


2,808 


1899-00 


9,004 


11,704 


1,225 


2,848 


1900-01 


9,902 


12,193 


1,308 


1,998 


1901-02 


10,150 


13,636 


1,337 


2,783 


1902-03 


10,318 


13,893 


577 


2,775 


1903-04 


12,311 


16,845 


179 


3,568 


1904-05 


13,571 


17,425 


1,190 


3,654 


1905-06 


14,447 


17,730 


2,497 


4,722 


1906-07 


15,512 


18,274 


1,029 


4,989 


1907-08 


17,088 


18,264 


2,668 


2,292 


1908-09 


I4>2I3 


15,945 


1,428 


2,096 


1909-10 


15,217 


19,437 


2,465 


4,102 


1910-11 


16,567 


21,708 


728 


3,955 


1911-12 


18,768 


23,835 


565 


4,037 


1912-13 


2i,54i 


25,685 


535 


3,850 


1913-14 


22,013 


25,609 


1,831 


4,660 



indirect estimates of India's foreign borrowings clearly show 
that their annual flow was subject to large variations. 

Bearing in mind this divergence between the conditions 
assumed by theory and those existing in India, if we scan the 
course of India's commodity imports, we find that they were 
increasing every year during 1898-99 to 1913-14 except in 
1908-9. It is not possible to find out how much of the increase 
in imports was due to foreign borrowings and to the unusual 



Adjustment of the Balance of Payment 181 

prosperity of our exporters, separately, but it can be safely 
assumed that it was in part at least the result of India's capital 
imports during the period. This much for the part played 
by the relatively low prices of imported articles and the in- 
creasing spendable income of the people in India. However, 
the adjustment of the balance of indebtedness to foreign 
borrowings according to theory is brought about not only by 
an increase in imports but also by a decrease in exports. 
Naturally, therefore, simultaneously with the increase in 
India's imports, we should expect a decrease in her exports, 
if the mechanism of adjustment in India is to serve as a 
verification of deductive theory. But the figures of commodity 
exports from India reveal an entirely different state of affairs. 
Simultaneously with the increase in commodity imports, there 
was a much larger increase in commodity exports and this 
in spite of the fact that the export prices in India during 
1898 to 1913 displayed the greatest rise. If foreign borrowings 
were the only factor disturbing the even balance between 
India's credit and debit obligations then we should have 
expected a reduction in the total value of Indian exports. That 
this did not happen, but that there was on the contrary an 
increase in Indian exports, suggests that some other powerful 
factor was in operation, tending all the time to over-balance 
the effect of foreign borrowings. This factor, as we have seen 
in the previous chapter, was an increasing demand for Indian 
exports. Had it not been for the intervention of this factor, the 
rising prices of export commodities due to the increased 
spendable income in India consequent upon her foreign 
borrowings might be expected to have reduced her com- 
modity exports. As it was, the adjustment of India's balance of 
payments to the inflow of foreign funds was effected largely, 
possibly wholly, by an increase in her imports. 

We, therefore, conclude that the process of adjustment of 
India's balance of indebtedness to her foreign borrowings 
was to a great extent obscured by the increasing demand for 



1 82 Indians Balance of Indebtedness 

her export commodities which set in at the beginning of the 
present century and continued till the outbreak of the war. In 
the absence of this factor, the adjustment of India's balance 
of trade to her varying foreign borrowings would have been 
brought about under the Gold Exchange Standard, subject 
to the peculiar conditions of Indian economic life, in exactly 
the same manner as it is effected under the pure Gold Standard. 

FOREIGN BORROWINGS AND THE TERMS OF INTERNATIONAL 

EXCHANGE 

According to Mill, during a period of foreign borrowings 
prices rise in the borrowing country and fall in the lending 
country. It is a corollary of this reasoning that during a period 
of foreign borrowings the terms of international exchange, or 
to use Professor Taussig's expression, "the barter terms of 
trade," 1 should move in favour of the borrowing country and 
against the lending country in other words, that the borrowing 
country obtains more of imported goods in exchange for each 
unit of its exports than it did before the foreign borrowings 
set in. This shift in the barter terms of trade which represents 
a shift in the reciprocal demand of borrowing and lending 
countries for each other's products is essential to the adjust- 
ment of the balance of indebtedness to foreign borrowings, 
both under barter and money exchange. However, under 
barter, the transfer of loans to the borrowing country in the 
form of goods comes first and is the cause and not the effect 
of the shift in the terms of international exchange. The shift 
in the terms of international exchange serves to restore equili- 
brium in the trade in those commodities which are not directly 
connected with foreign borrowings. Under money exchange 
the shift in the barter terms of trade is the condition precedent 

1 Professor A. C. Pigou expresses this quantitative relation between 
commodity imports and exports by the phrase "real rates of inter- 
national interchange." 



Adjustment of the Balance of Payment 183 

to the coming in of foreign borrowings in the form of goods. 
An increased foreign demand for the export commodities 
of a country has a similar influence on its barter terms of trade 
as foreign borrowings. In the case of India, therefore, where 
both the factors were operating simultaneously during the 
period of our study, we should expect the barter terms of trade 
to move to her advantage. 



THE BARTER TERMS OF TRADE 

There are two ways of looking at the barter terms of trade. 
One may be indicated by the phrase "net barter terms of 
trade"; the other by the "gross barter terms of trade." The 
first takes into consideration those goods only which pay for 
goods, while the second regards the whole volume of goods, 
both imports and exports. 1 The net barter terms are those 
of the exchange of domestic goods for foreign goods in the 
simplest case, where the international trade is concerned only 
with the purchase and sale of merchandise. In modern times 
the international trade of a country includes, besides mer- 
chandise transactions, a large volume of non-merchandise 
transactions. Therefore, the net barter terms of trade have 
now become a purely theoretical concept. The actual inter- 
national trade of any modern country can be separated into 
two parts: first, the exchange of exported goods for an equal 
money value of imported goods ; second, an excess in money 
value of imported goods over the exported goods or vice versa, 
representing the balance of non-merchandise transactions. 
This distinction is theoretical only. What actually happens is 
that one "unsegregated mass" of physical goods flows into 
the country as imports and another mass flows out as exports. 
A country having a credit balance of payments on "invisible" 
account receives a larger money value of imports than that of 

1 F. W. Taussig, International Trade, p. 113. 



184 Indicts Balance of Indebtedness 

its exports, and a country in the reverse position pays out a 
larger money value of exports than that of her imports. The 
physical volume of the imported goods as compared with the 
physical volume of the exported goods will be greater for the 
country having an excess of imports in money value and 
smaller for the country having an excess of exports. This rela- 
tion between the whole of a country's physical imports and 
exports which we encounter in fact constitutes the "gross 
barter terms of trade. " 

THE MEASUREMENT OF THE BARTER TERMS OF TRADE 

The barter terms of trade must always be advantageous to all 
the countries having trade relations because the terms must 
lie within the limits fixed by the comparative costs of pro- 
duction. Otherwise the countries which do not get any ad- 
vantage from an international exchange of goods would not 
enter into international trade at all. However, the advantages 
of an international exchange may not be equally shared by the 
countries concerned at any time and may be shared by any 
one country differently at different times. Therefore, a shift 
in the "barter terms of trade" of a country to its advantage or 
disadvantage means more favourable terms or less favourable 
terms than before. The terms on which a country barters its 
imports for its exports cannot be measured, but the modifi- 
cations which may arise in these terms and which the theorists 
have in mind when they say that the terms of trade generally 
move in favour of the borrowing country and against the 
lending country, can be measured. As Professor Taussig says: 
"They only indicate in which direction the accretion of gain 
from international exchange is changing; whether the gain, 
whatever it be in a given year, is less or greater in that year 
than in previous years or in subsequent years. It is changes 
and changes alone, both in the net barter terms of trade and 
in the gross barter terms, which we are able to follow/ 1 The 



Adjustment of the Balance of Payment 185 

barter terms of trade can be said to have moved in favour of 
India if the quantity of exported goods paid in exchange for 
a given quantity of imported goods shows a decrease during 
the period of our study, as compared with the quantity of 
exported goods paid in 1898. To put it in another way, the 
barter terms of trade can be said to have moved in favour of 
India if the quantity of imported goods received in exchange 
for a given quantity of exported goods shows an increase 
during the period as compared with the quantity of imported 
goods received in 1898. On the other hand, the barter terms 
of trade can be said to have moved against India if the quantity 
of exported goods paid in exchange for a given quantity of 
imported goods shows an increase or if the quantity of imported 
goods received in exchange for a given quantity of exported 
goods shows a decrease during the period, as compared with 
the respective ratios prevailing in 1898. 



INDIA'S NET BARTER TERMS OF TRADE 

The net barter terms of trade take into account only those 
goods which pay for goods. Therefore, as the foreign trade of a 
country is carried on in terms of money values, the value of 
goods imported and the value of goods exported in exchange 
must always be equal. Thus if the imports and exports in each 
single year are the same in money value, it follows that a 
change in import and export prices indicates accurately a 
change in physical quantity. 1 If export prices fall relatively to 
import prices it means that more of exports are exchanged 
for a given quantity of imports and vice versa. The relative 
changes in India's net barter terms of trade can, therefore, 
be ascertained by forming an index number of the ratio 
between her import and export prices with the ratio of 



1 A. L. Bowley, England's Foreign Trade in the Nineteenth Century \ 
p. 20. 



1 86 India's Balance of Indebtedness 

as the basis. 1 However, it need hardly be said that the sup- 
position underlying this aspect of the barter terms of trade 
does not conform to reality. The imports and exports of 
India were never equal in money value and, hence, her net 
barter terms of trade are merely a hypothetical matter. 



INDIA'S GROSS BARTER TERMS OF TRADE 

The gross barter terms of trade which take into account the 
whole of a country's imports as compared with the whole 
of its exports, represent the real terms on which that country 
exchanges her export commodities. Therefore, the direction of 
changes in those terms will be an accurate index as to whether 
the advantage of international exchange was shifting in her 
favour or against her during 1898 to 1913. To ascertain the 
relative changes in India's gross barter terms of trade we 
adjust the values of imports and exports every year during 
the period of our study to their respective prices prevailing 
in the year 1898. The new values would then represent the 
values of the physical volume of goods imported and exported 
as they would have been if prices had remained unchanged 
since 1898. Thus prices being reduced to a common basis a 
larger or smaller money value would necessarily represent a 

1 The method can be more easily explained by means of an equation : 

The value of goods imported X = the quantity of goods imported Y, 
X the import prices, m. 

The value of goods exported X 1 = the quantity of goods exported 
Y 1 , X the export prices, m 1 . 

The net barter terms of trade = the quantity of goods exported 

Y 1 

-r the quantity of goods imported = . 

But since X 1 = X 

Y'm' = Ym. 

Y' m . 

.*. = SB import prices -r export prices. 
Y m l 



Adjustment of the Balance of Payment 187 

larger or smaller volume of physical goods. 1 The adjusted 
figures of money values become measures of physical quantities. 
If, therefore, we take the proportion of imports to exports 
in 1898 as 100 and deduce the change in that ratio for the 
other years, we shall get an accurate index of changes in 
India's gross barter terms of trade. We say it once more that 
here as well as in the figures regarding the net barter terms 
of trade there is nothing which tells us whether the terms are 
in themselves favourable for any given year. They indicate 
only the direction and extent of changes. 

The Index Numbers of India's "net barter terms of trade" 
and "gross barter terms of trade," prepared according to the 
methods explained above, are presented in Table XXXIII. 

The net barter terms of trade as well as the gross barter 
terms of trade as indicated by their respective index numbers 
were moving to the greater and greater advantage of India 
throughout the period of our study, except during one or two 
years, when they seem to have moved against India. A given 
physical quantity of imports was being purchased for a steadily 
declining physical quantity of exports. But, though the general 
trend of the barter terms of trade is favourable to India, there 
were variations in them in particular years. Both these pheno- 
mena, the movement of the barter terms of trade against 
India in certain years and their irregular, though, on the whole, 
favourable tendency during the period, are due to the inter- 
mittent character of the operating influences, viz. the foreign 
borrowings and the foreign demand for export commodities. 
However, as the general trend of the barter terms of trade was 
favourable to India, the expectations of theory in regard to 
the effect of foreign borrowings and increased foreign demand 
for export commodities are fully realized. 

During the pre-war period of the present century not only 

1 The value of a commodity is determined by its quantity and 
price. If the price remains constant any change in the value of that 
commodity must be due wholly to a change in the quantity. 



X 88 India's Balance of Indebtedness 



P 

S I 

M W 



* I 

S 1 







a 

PQ 






o 

isaf 



O^ N ^ M VP ~ Tf "t N 00 CON N COCOONVO 

>M" cfcTcTHrcNriOTFincrcoM cococo^fco 

. MMMMMMMMMMMMMMMM 


M ONOOOOsvOKOOMMfO 

^ii ^st!!ls^^^inl n h?M ) M!C > M'MM 

I^OO MMMMMMr^^^^^P^"^ p^i-ii-ii-i 



'1 



cocoso t>.toooo IO^M 



w 



^ 



^ 

8 



g. oo* c oo o *H 

MM 



H" oo" 



M c 



Adjustment of the Balance of Payment 189 

India but all countries mainly exporting raw materials were 
gaining heavily because of the fall of freights and the con- 
stantly growing demand for their products from industrial 
countries where new industries were being rapidly established. 
During the same period the barter terms of trade moved to 
the disadvantage of the industrial countries. For Great Britain, 
the chief industrial country of the pre-war period, the barter 
terms of trade became more and more advantageous between 
1880 and 1900. But after 1900 the terms of trade were moving 
against her, right till the outbreak of the war. 1 As Dr. Marshall 
has observed, countries in the position of India "have gained 
all round: they have gained by lower cost of transport, and 
they have gained by the lower cost of manufacture of com- 
modities for direct use ; and that almost equally whether these 
goods are manufactured by themselves or imported. For 
competition compels England, Germany, and other Western 
countries to give to consumers almost at once the full benefit 
of any economy in manufacturing which they have obtained. " 
Moreover, the countries whose gains from international 
exchange displayed an upward tendency were mostly the 
capital-borrowing countries, while the countries whose gains 
were diminishing were mostly the capital-lending countries. 



MONEY WAGES AND THE BARTER TERMS OF TRADE 

The concrete way in which the inhabitants of a country obtain 
the benefit of more favourable terms of trade net or gross 
is that their money incomes rise while the prices of imported 
commodities fall, or rise more than the prices of imports. With 
the same amount of labour they can purchase more of imported 
goods. Hence we should expect the increasing advantage 
obtained by India during 1898 to 1913 to be associated with a 
rise in money wages. The trends of the curves representing 

1 F. W. Taussig, "The Changes in Great Britain's Foreign Trade 
Terms after 1900." 35. Economic Journal, 1925. 



190 



India's Balance of Indebtedness 



DATA OF CHART III 



INDICES OF MONEY WAGES AND THE BARTER TERMS OF TRADB 



Year 
1898-99 
1899-00 
1900-01 
1901-02 
1902-03 
1903-04 
1904-05 
1905-06 
1906-07 
1907-08 
1908-09 
1909-10 
1910-11 
1911-12 



Index Number 
of Money Wages 


Index Number 
of the Net 
Barter Terms 
of Trade 


Index Number 
of the Gross 
Barter Terms 
of Trade 


IOO 


IOO 


IOO 


104 


89 


82 


108 


97 


84 


no 


97 


94 


U3 


98 


93 


US 


IOO 


96 


118 


101 


91 


123 


102 


88 


127 


82 


68 


134 


96 


7* 


139 


93 


74 


145 


86 


76 


147 


82 


75 


155 


81 


73 


157 


80 


67 


161 


75 


61 



1913-14 

the money wages and the barter terms of trade net as well 
as gross drawn in Chart III justify this expectation. It clearly 
shows the natural inverse 1 correlation between the money 
wages and the terms of trade. 

Exports 



1 This is because the terms of trade are calculated as = 



Imports ' 



Adjustment of the Balance of Payment 191 

CHART III 
INDICES OF MONEY WAGES AND THE BARTER TERMS OF TRADE 



CONCLUSION 

THE main purpose of this study has been to follow the 
mechanism of international adjustment under a gold-exchange 
standard regime with special reference to that phase of it 
which is concerned with the adjustment of trade balances. In 
the light of India's foreign trade conditions during the pre- 
war period of the gold-exchange standard the following con- 
clusions may be offered. 

If the even balance between credit and debit obligations of 
a country is disturbed by an outbreak of heavy foreign 
borrowings the volume of which remains constant for a long 
period, the mechanism of adjustment of the balance of 
indebtedness to its foreign borrowings is substantially the same, 
whether the country is on a gold standard or a gold-exchange 
standard. The only difference, which is more apparent than 
real, is that while under a gold standard it is gold which flows 
to the borrowing country and sets the mechanism of adjust- 
ment in operation, under a gold-exchange standard the func- 
tion is performed by "gold exchange" in the case of India 
by the Council Bills. The flow of gold exchange increases the 
spendable income in the borrowing country and raises its 
price-level relatively to the price-level in the lending country. 
In the borrowing country itself import prices tend to fall or 
register the least rise, domestic prices register the greatest 
rise, and export prices follow them more or less closely. As a 
result of these changes in the sectional price-levels of the 
borrowing country, commodity imports are stimulated and 
exports restricted, so that there results an unfavourable balance 
of trade equal in volume to the annual foreign borrowings. 
When this stage is reached the flow of gold exchange to the 
borrowing country ceases and foreign borrowings practically 
enter the country in the form of commodities. 

The working of this mechanism of adjustment of India's 



Conclusion 193 

balance of indebtedness to her foreign borrowing during the 
period of our study was greatly obscured, especially in the 
latter half of the period by another factor viz, increased 
foreign demand for India's export commodities more power- 
ful than foreign borrowings. Therefore the restrictive effect 
of higher domestic prices and consequently of higher costs of 
production on commodity exports, caused by the transfer of 
a part of foreign borrowings to India in the form of spendable 
income, was more than counter-balanced by a simultaneous 
increase in the foreign demand for them. So far as the other 
steps of the mechanism of adjustment are concerned, both the 
factors disturbing the even balance between India's credit 
and debit obligations during the period were working in the 
same direction. It is not possible to single out either of these 
factors and trace its effects on Indian prices and money wages 
and ultimately on the commodity balance of trade. Hence, 
bearing in mind the various stages in the process of adjustment 
of balances of indebtedness to foreign borrowings under a 
gold- standard system, we have tried to find out if the mechan- 
ism was different under a gold-exchange standard system, 
and wherever it was found to be different we have tried to 
discover if the difference was due to the other factor operating 
on India's foreign trade during the same period. The theoreti- 
cal conclusions drawn from this study cannot, therefore, be 
considered as clearly brought out from the Indian case. They 
are essentially tentative in character. 

Besides, the peculiarities of India's economic life in general 
serve as a still further qualification to the conclusions offered 
above. The vast extent of the country, its enormous immobile 
population, the sluggish character of its entire economic life 
make it possible for marked changes to take place in inter- 
national transactions with much retarded effects on domestic 
trade. Through long periods foreign exchange, imports and 
exports, and the prices of imported and exported goods can 
vary as if they were quite in a realm of their own, separated 

N 



194 India's Balance of Indebtedness 

by a wide gulf from the prices of Indian domestic goods arid 
from the money incomes of the great mass of people. Economic 
adjustments take place slowly in India, but that they are 
governed by the same laws and occur in the same manner as 
elsewhere cannot be disproved. 



APPENDIX I 

PROFESSOR FINDLAY SHIRRAS'S METHOD 
OF ASCERTAINING FREIGHT CHARGES 

WE shall discuss here some of the methods which have been 
used by previous writers in calculating the freight charges 
paid by India on her foreign trade. Professor Shirras calculates 
the freight charges on India's foreign trade in 1922-23. His 
calculation is based upon a study of the earnings of British 
shipping on different trade routes in 1913, made by the Board 
of Trade. 1 According to the Board of Trade study, 9 per cent 
of the total British shipping earnings in 1913 were realized 
on the Indian trade route. Professor Shirras assumes that this 
percentage was true for the year 1922-23 also, and estimates 
that on this assumption the earnings of British shipping on 
the Indian trade route in 1922-23 amounted to Rs. 15 crores 
approximately. 2 This, according to Professor Shirras, is 
equivalent to the sum that India paid on account of freight 
charges on her foreign trade. 

Professor Shirras's method is open to one fundamental 
criticism. It cannot be said with any justification that the 
percentage of Great Britain's freight earnings on the Indian 
route to her total earnings on all routes remained constant 
between 1913-14 and 1922-23, or that it was the same for the 
years 1913 and 1922, in the face of the facts that: 

(i) The percentage of British tonnage engaged in Indian trade 
in 1922-23 was not the same as in 1913, and that 

1 Board of Trade Journal, February 3, 1921. 

* " India's share of the total earnings of the United Kingdom 
shipping was 9 per cent [in 1913]. Taking that proportion for the 
year 1922 . . . this would give us a figure of Rs. 15 crores as the 
gross earnings of British shipping [from Indian trade] during the 
year." G. Findlay Shirras, Proceedings of the Seventh Indian Economic 
Conference^ p. 77. 



196 India's Balance of Indebtedness 

(ii) The relation between cargo available and the amount of 
tonnage engaged changed between the two years. 

To Great Britain her mercantile marine is a monopoly 
concern and hence amenable to the laws of monopoly profits. 
The amount of shipping tonnage and the level of freight rates 
on a particular trade route are largely determined by the 
condition of demand on the other trade routes which is ever 
changing. Thus, if the amount of shipping tonnage and freight 
rates on different trade routes are constantly fluctuating it 
is very likely that the shares of Great Britain's freight earnings 
on each of these routes might have considerably changed 
during the period 1913 to 1922. This general observation is 
still more true in the case of India. The employment of shipping 
on this route seems to have become much less economical in 
1922 than in 1913 and the tonnage had become greater in pro- 
portion to the cargo available. 1 Hence, to suppose that 9 per 
cent of the total freight earnings of Great Britain every year 
are contributed by the Indian route because such was the 
case in a particular year appears to be illogical and incorrect. 

S. N. HAJl'S METHOD 

A similar percentage method has also been used by S. N. Haji, 
but only to confirm the results he obtained by other methods. 
Nevertheless as a method, unless justified, it is faulty even for 
corroboration. S. N. Haji takes us back to the days of Sir 
Robert Giffen, who in the year 1882 calculated that approxi- 
mately 10 per cent of the value of a commodity should be 
assigned to freight and insurance charges. Haji accepts this 
percentage to be true even for the year 1921-22 forty years 
after Sir Giffen's calculation and allowing for insurance and 
other charges takes 8 per cent of the value of a commodity to 
represent freight charges. What is still more surprising is that 

1 A. J. Sargent, Seaways of the Empire, p. 70. 



Appendix I 197 

he even procures a remarkable confirmation of this 8 per cent 
rate from the ad valorem percentage of freight charges to 
imports for the year 1921-22. It is, however, easy to discover 
from the data he has presented that his corroborative ad valorem 
percentage is unweighted, which makes all the difference 
between confirmation and disproof. 1 The objections to using 
Sir Robert Giffen's freight percentage, which had no relation 
whatsoever to the conditions of trade, shipping, and freights 
prevailing in the year 1921-22, seem to be stronger than they 
were for the percentage used by Findlay Shirras. Since the 
time of Robert Giffen vast changes had taken place in the 
position of the shipping industry. Freights have been cut 
down drastically, the tonnage of steamships had been greatly 
augmented, and the transition from sailing vessels to steel 
steamships had been almost completely effected. The efficiency 
of the steam tonnage has been enormously increased in recent 
years both in regard to speed and carrying capacity; indeed, 
practically the whole of the British Mercantile Marine was 
rebuilt during the first decade' of the twentieth century. 2 

One more questionable point in the use of GifFen's per- 
centage by Haji is that he has applied it to India's imports as 
well as exports. It is a well-known fact that inward freight 
rates and outward freight rates display large differences. Some- 
times these differences are so large that the loss in inward 
freights is made up by the profits on outward freights and 
vice versa,3 If this statement is true, it follows that the ad 
valorem percentage of freight charges to import values might 
have been different from the ad valorem percentage of freight 

1 S. N. Haji, Economics of Shipping, p. 324. 

* Quarterly Review, July 1911, p. 53. 

3 The Economist, February 18, 1899, "Commercial History and 
Review of 1898": 

"For some years outward and homeward freights have reflected 
on each other an inverse ratio, that when the rates have been good 
outwards they have declined homeward and vice versa/' Also the 
same supplement for February 18, 1913. 



198 India's Balance of Indebtedness 

charges to export values. Moreover, as the commodities, 
imported and commodities exported are different, having 
different values per unit, the percentage of freight charges to 
imports and exports, even if the rate per ton be the same, will 
be different. 



APPENDIX II 

SAVINGS PER HEAD BROUGHT BY IMMIGRANTS 
FROM DIFFERENT COLONIES 





I 


II 


Ill 


IV 


Year 


Natal 


Fiji 


Trinidad 


Mauritius 




Rs. 


Rs. 


Rs. 


Rs. 


1898-99 





230 








1899-00 








216 





1900-01 














1901-02* 


285 











1902-03 





270 





30 


1903-04 





308 





19 


1904-05 





300 





26 


1905-06 








237 


8 


1906-07 





'483 





8 


1907-08 





285 





3 


1908-09 


75 





375 





1908-10 


105 





375 





I9io-nt 


105 











1911-12 














1912-13! 


135 


315 








I9i3~i4 


135 


360 


135 





* 1901-02 


Reunion and Guadeloupe 


Rs. 135- 


t 1910-11 


Surinam 


. . 




Rs. 840. 


J 1912-13 


Demerara 




. . 


Rs. 195. 


I9I3-I4 


Demerara, 


Jamaica, and Surinam . . 


Rs. 150. 



APPENDIX III 

REMITTANCES PER HEAD BY RESIDENT INDIAN 
EMIGRANTS IN THE VARIOUS COLONIES 



Year 


Natal 
Rs. 


Fiji 
Rs. 


1903-04 


20 


2 


1904-05 


17 


I 


1905-06 


16 


2 


1906-07 


15 


I 


1907-08 


15 


I 


1908-09 


8 


I 


1909-10 


9 


I 


1910-11 


10 


I 


1911-12 


9 


I 


1912-13 


10 





1913-14 


IO 






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INDEX 



Ambedkar, 173 
Atkinson, 159 

Balance of international indebted- 
ness, preliminary estimate, 95 ; 
final estimate, 103 

Balance of non-commercial trans- 
actions, see Contents, Chapter 
III, 101 

Balance of service transactions, 
see Contents, Chapter II. 

Barter terms of trade, 183, 184; 
measurement of, 184, 185 ; net, 
185, 1 86; gross, 186 

British Postal Orders, 77, 78 

Canada, 33 

Commodity Balance of Trade, 

25, 46, 47, 1 77-i & 
Council Bills, 85-87, 144-150, 

152-155, 175 
Coyajee, 166, 171, i74 
Crammond, 97, 108, 109, 117, 

119, 123 

Daniels, 41 
Dutta, 41, 43 

Economist, 105, 107, 108, 116, 122 
Exchange Banks, 58-61 ; in rela- 
tion to Indian foreign trade, 144 

Flux, 161 

Foreign Capital investments, 
statistics of, 104-106; from 
Great Britain, public issues, 
107; private issues, 122-127; 
Edgar Crammond's estimate, 
108, 109; Sir George Paish's 
estimate, iio-ii3;H. F. How- 
ard's estimate, 113-117; direct 
and indirect estimates, 127 



Foreign Exchange, see Contents 
Foreign Exchange and Gold 
Movements; its influence on 
the adjustment of trade bal- 
ances, 140-144 

Foreign Money Orders, 75-77 
Freight charges, method of ascer- 
taining, 35-4o; of India, 40; 
on foreign trade, 50, 51; on 
coastal trade, 51-57 

Giffen, 35, 51, 57 

Gold, movements of, see Con- 
tents Foreign Exchange and 
Gold Movements. 

Gold-Exchange Standard, 86,138, 
139 

Haji, 38, 53, 196, 197, 198 
^Hobson, 51, 55 
Hollander, 143 
Home charges, 61-65, 85 
Howard, 83, 93, 97, 108, 113-117, 
118, 119 

Imports of treasure, 32-35 

India Bills, 91, 92 

Indian emigrants, 68-74 ; savings 

of, 70, 71; capital brought in 

by, 71 
Insurance charges, method of 

ascertaining, 45-48; on coastal 

trade, 54 
Interest payments, 95-101 

Jewkes, 41 

Keynes, 88, 145, 149, 155, 165 

Layton, 158 

Lehfeldt, 97, 98, 128, 129 



210 



Indicts Balance of Indebtedness 



Marshall, 189 
Mill, 136, 182 
Mitchell, 158 
Muranjan, 161, 172 

Nicholson, 172 

Paish, 110-113, 117, 119, 123, 124 

Pigou, 182 

Postal articles, imported, 75, 76, 
77, 78 

Prices, Indian domestic, 167-171 ; 
Indian import, 167-171 ; In- 
dian export, 167-171 

Railway annuities, 91 
Remittance from India, means of, 
74, 75 

Sargent, 196 

Settler's effects, 29, 30, 68 
Shirras, 54, 55, 57, 61, 151, 195. 
196 



Taussig, 17, 182, 183 
Telegraphic transfers, 85 
Through foreign Money Orders, 

78-80 
Tourists' expenditure, 65, 66 

United States of America, 67 

Vakil, 91, 161, 172 
Viner, 38, 44, 99, 131, 170, I73> 
177 

Wages, money, 189, 190; in rela- 
tion to barter terms of trade, 
189, 190 

Whitaker, 178 

Wholesale prices, Indian index 
number of, 159-161; British 
index number of, 161, 164 

Williams, 172 

Wood, 39, 44 



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